nvcsr
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21869
Highland Credit Strategies Fund
(Exact name of registrant as specified in charter)
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of principal executive offices) (Zip code)
R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Name and address of agent for service)
Registrants telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: December 31, 2009
Form N-CSR is to be used by management investment companies to file reports with the Commission not
later than 10 days after the transmission to stockholders of any report that is required to be
transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR
270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission
will make this information public. A registrant is not required to respond to the collection of
information contained in Form N-CSR unless the Form displays a currently valid Office of Management
and Budget (OMB) control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the burden to Secretary,
Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed
this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
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Highland Credit Strategies Fund
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TABLE OF CONTENTS
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Portfolio Managers Letter |
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1 |
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Fund Profile |
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5 |
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Financial Statements |
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6 |
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Investment Portfolio |
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7 |
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Statement of Assets and Liabilities |
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14 |
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Statement of Operations |
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15 |
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Statements of Changes in Net Assets |
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16 |
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Statement of Cash Flows |
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17 |
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Financial Highlights |
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18 |
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Notes to Financial Statements |
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19 |
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Report of Independent Registered Public Accounting Firm |
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29 |
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Additional Information |
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30 |
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Important Information About This Report |
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36 |
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Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
Privacy Policy
We recognize and respect your privacy expectations, whether you are a visitor to our web site,
a potential shareholder, a current shareholder or even a former shareholder.
Collection of Information. We may collect nonpublic personal information about you from the
following sources:
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Account applications and other forms, which may include your name, address and social
security number, written and electronic correspondence and telephone contacts; |
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Web site information, including any information captured through the use of
cookies; and |
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Account history, including information about the transactions and balances in your
accounts with us or our affiliates. |
Disclosure of Information. We may share the information we collect with our affiliates. We may
also disclose this information as otherwise permitted by law. We do not sell your personal
information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal
information about you to our employees and agents who need to know such information to provide
products or services to you. We maintain physical, electronic and procedural safeguards that comply
with federal standards to guard your nonpublic personal information, although you should be aware
that data protection cannot be guaranteed.
PORTFOLIO MANAGERS LETTER
Highland Credit Strategies Fund
Dear Shareholders:
We are pleased to provide you with our report for Highland Credit Strategies Fund (the Fund) for
the year ended December 31, 2009. Below is an overview of the leveraged loan and high yield bond
markets, the Funds performance and the drivers behind that performance; the Funds portfolio data;
and our outlook for 2010.
MARKET REVIEW 2009
The investment environment in the leveraged loan and high yield bond markets in 2009 reversed much
of the unprecedented declines experienced in each of these markets during 2008. The leveraged loan
market increased 44.8%, as measured by the Credit Suisse Leveraged
Loan Index1 and the
high yield bond market increased 54.2%, as measured by the Credit Suisse High Yield Bond
Index.2 The average bid of leveraged loans was 87.4% of par on December 31, 2009, almost
reaching the pre-Lehman level of 87.6% of par on August 29, 2008. The average bid of high yield
bonds increased from a pre-Lehman level of 87.0% of par on August 29, 2008 to 93.3% of par on
December 31, 2009. An increase in bids narrowed the discounted spread of leveraged loans from an
all-time high of 1842 basis points3 over the London Interbank Offering Rate (LIBOR) on
December 31, 2008 to 697 basis points over LIBOR on December 31, 2009, which aligns more closely
with the trailing 10 year average of 509 basis points over LIBOR.4 Similarly, the
increased bid of high yield bonds drastically decreased the average yield to worst5 of
the Credit Suisse High Yield Bond Index from 18.9% on December 31, 2008 to 8.7% on December 31,
2009.6
Leveraged Loans
The loan market during 2008 and 2009 was characterized by unprecedented volatility, with a dramatic
decrease in prices during 2008 followed by a sharp increase in prices during 2009. The Credit
Suisse Leveraged Loan Index fell to a low of 61.6% in December 2008 only to spend the next twelve
months rallying back to 87.4% by December 31, 2009. This volatility was primarily driven by the
reversal of technical pressures generated by the turmoil in the credit markets during the second
half of 2008. September 2008 brought stunning news within the global financial sector including:
Fannie Mae and Freddie Mac being put into conservatorship, the collapse of Lehman Brothers, the AIG
bailout, Bank of Americas purchase of
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1 |
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Credit Suisse Leveraged Loan Index is an index tracked by Credit Suisse designed to mirror the investible universe of the US dollar denominated leveraged loan market. |
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Credit Suisse High Yield Bond Index is an index tracked by Credit Suisse designed to mirror the investible universe of the US dollar denominated high yield debt market. |
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Discounted spread calculation assumes discount to par is amortized evenly over an average three-year remaining life. |
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As measured by the Credit Suisse Leveraged Loan Index. |
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Yield to worst is a measure of yield that takes into effect a bonds yield to call or yield to maturity, whichever is lowest. |
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As measured by the Credit Suisse High Yield Bond Index. |
Annual Report | 1
PORTFOLIO MANAGERS LETTER
Highland Credit Strategies Fund
Merrill Lynch, volatility in LIBOR and other intrabank rates, and a host of global financial
regulators taking monumental efforts to stabilize and restore confidence in the global financial
system. This uncertainty and other factors resulted in sellers outnumbering willing buyers and
created a systematic deleveraging, particularly in the hedge fund community. This impacted the
senior secured bank loan market along with markets for other assets in an unprecedented manner.
During 2009, the technical environment in the leveraged loan market strengthened considerably.
Forced selling was significantly lower in 2009 than in 2008, while the level of new issue bank
loans decreased from $148.4 billion in 2008 to $66.9 billion in 2009. The volume of new issue loans
declined at the same time that leveraged loan investors needed to reinvest capital following debt
paydowns from bond refinancings, buy-backs, tenders and other repayments of debt by issuers,
resulting in a lower supply but higher demand for loan assets. This increased cash in the market
was augmented by new investors finding the depressed trading levels attractive, entering the market
and pushing the bid price up. In addition to the improved technical environment, during the summer
of 2009, macroeconomic and issuer fundamentals began to show signs of bottoming accompanied by a
slight improvement. The increased refinancing activity and improving fundamental outlook combined
to significantly decrease default expectations during 2009.
High Yield Bonds
During the year ended December 31, 2009, high yield bond new issuance was active, with over $180.7
billion in new issues in 2009, compared to $52.9 billion in 2008.7 The main purpose of
new issues during 2009 was refinancing, which benefited the leveraged loan market as well as the
high yield bond market. We expect high yield bond issuance to remain active in 2010, primarily for
the refinancing of leveraged loans, but also in connection with the refinancing of existing high
yield bonds. There is also a demand for high yield bonds given the increase in mutual fund flows
into this asset class. This continuing trend is a positive catalyst for leveraged loans and
existing high yield bonds. In a refinancing transaction, existing debt holders typically receive a
paydown at par resulting in immediate capital appreciation for loans or bonds trading below par. In
addition, the proceeds from the paydown need to be reinvested, typically back into leveraged loans
or high yield debt. This increased demand for high yield debt caused stronger technicals in the
secondary market, which contributed to the markets impressive performance during 2009.
FUND PERFORMANCE OVERVIEW
On December 31, 2009, the net asset value of the Fund was $7.20 per share, as compared to $6.51 on
December 31, 2008. On December 31, 2009, the closing market price of the Funds shares on the New
York Stock Exchange (ticker symbol HCF) was $6.31 per share, as compared to $5.70 on December 31,
2008. During the year ended December 31, 2009, the Fund paid distributions to common shareholders
of $0.79 per share. The total return on the Funds net assets, assuming reinvestment of
distributions, was approximately 27.92% for the twelve months ended December 31, 2009. The Funds
performance was driven by the overall improvement in the broader leveraged loan and high yield bond
market and asset selection within several industries, including broadcasting and healthcare.
However, there were positions held during the period that contributed negatively to the portfolios
return, including positions in the gaming/leisure sector whose value was correlated with the
deteriorating domestic real estate market. We are comfortable with the current leverage and
positioning of the Fund. We continue to believe that, over the long-term, fundamental factors will
outweigh technical factors and diligent credit analysis coupled with proper asset and sector
allocation will lead to solid performance.
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7 |
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J.P. Morgan, Credit Strategy Weekly Update, January 8, 2010. |
2 | Annual Report
PORTFOLIO MANAGERS LETTER
Highland Credit Strategies Fund
FUND DATA
As of December 31, 2009, and December 31, 2008, the Funds investment portfolio, exclusive of cash
and cash equivalents, was allocated as follows:
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December
31, 2009
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December
31, 2008 |
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As of December 31, 2009, the Funds portfolio was comprised of approximately 62.03% in senior
loans, 21.84% in corporate notes and bonds, 10.25% in equity interests and 5.88% in asset-backed
securities. As of December 31, 2009, the Fund had leverage from its credit facility in the amount
of approximately 18.5%. The Fund may use leverage constituting indebtedness in an aggregate amount
up to 25% of the Funds total assets (including the proceeds from the leverage), the maximum amount
allowable under its credit agreement. The use of financial leverage involves significant risks.
MARKET OUTLOOK 2010
We believe the financial market collapse during the second half of 2008 and the rally experienced
during 2009 were largely technical in nature and that the market has evolved into a fundamentally
driven, credit pickers market. We remain constructive on the leveraged loan and high yield bond
asset classes and believe good buying opportunities remain for the diligent investor. We expect
that further stability in the global economic environment may lead to continued stabilization in
the leveraged loan and high yield markets. We believe issuers will continue to bring amendments to
lender groups in an effort to stay within covenants, which we believe will improve the economics to
the lenders. The high yield market may continue to bifurcate, with well-collateralized debt and
debt issued by stable and improving companies continuing to trade well and debt issued by companies
facing economic and fundamental headwinds trading poorly. We think that the next fiscal year will
continue to be driven more by fundamentals and earnings.
Thank you for your continued participation in Highland Credit Strategies Fund. We look forward to
serving your future investment needs.
Brad Means
Portfolio Manager
Brad Means has been a portfolio manager of Highland Credit Strategies Fund since January 1, 2009.
Annual Report | 3
PORTFOLIO MANAGERS LETTER
Highland Credit Strategies Fund
Past performance does not guarantee future results. Performance during the time period shown is
limited and may not reflect the performance in different economic and market cycles. There can be
no assurance that similar performance will be experienced. Annualized total return is calculated by
PNC Global Investment Servicing (U.S.), Inc. The calculation assumes reinvestment of distributions
and other income.
Investing in closed-end funds involve certain risks. The risks involved in a particular fund will
depend on the securities held in that fund:
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Market Risk Refers to general stock market fluctuations. The value of any security can rise
or fall and when liquidated, may be worth more or less than the original investment. |
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Price Risk Refers to the fact that shares of closed-end funds frequently trade at a
discount from their net asset value. |
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Interest Rate Risk The risk that a rise in interest rates will cause the value of an
investment to decline. |
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Credit Risk Refers to an issuers ability to meet its obligation to make interest and
principal payments. |
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Leverage Risk The risk of higher share price volatility as leverage magnifies both gains
and losses. |
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Lack of Diversification Risk A non-diversified fund may be subject to greater price
volatility or adversely affected by the performance of the securities in a particular sector.
In addition, it may be more susceptible to any single economic, political, or regulatory
occurrence than the holdings of an investment company that is more broadly diversified. |
4 | Annual Report
FUND PROFILE
Highland Credit Strategies Fund
Objective
The Fund seeks to provide both current income and capital appreciation.
Total Net Assets of Common Shares as of December 31, 2009
$458.8 million
Portfolio Data as of December 31, 2009
The information below provides a snapshot of the Fund at the end of the reporting period. The
Fund is actively managed and the composition of its portfolio will change over time.
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Quality Breakdown as of 12/31/09 (%)* |
A |
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0.6 |
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Baa |
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5.5 |
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Ba |
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17.5 |
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B |
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50.6 |
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Caa |
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11.7 |
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Ca |
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0.2 |
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C |
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1.0 |
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NR |
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12.9 |
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Top 5 Sectors as of 12/31/09 (%)* |
Healthcare |
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22.5 |
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Diversified Media |
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8.8 |
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Financial |
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7.1 |
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Gaming/Leisure |
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6.2 |
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Broadcasting |
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5.4 |
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Top 10 Holdings as of 12/31/09 (%)* |
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Genesys Ventures IA, LP (Common Stocks) |
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6.3 |
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Celtic Pharma Phinco B.V. (Corporate Notes and Bonds) |
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5.2 |
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ComCorp Broadcasting, Inc. (US Senior Loans) |
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4.5 |
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SMG H5 Property Ltd. (Foreign Denominated Senior Loans) |
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3.0 |
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Digicel Group, Ltd. (Corporate Notes and Bonds) |
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2.4 |
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Lake at Las Vegas Joint Venture (US Senior Loans) |
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2.3 |
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TCD Pharma (Corporate Notes and Bonds) |
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2.3 |
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Dfine, Inc. (Preferred Stocks) |
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2.1 |
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Azithromycin Royalty Sub LLC (Corporate Notes and Bonds) |
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1.9 |
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Broadstripe, LLC (US Senior Loans) |
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1.9 |
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Quality is calculated as a percentage of total senior loans, asset-backed securities, notes and
bonds. Sectors and holdings are calculated as a percentage of total assets. |
Annual Report | 5
FINANCIAL STATEMENTS
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December 31, 2009
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Highland Credit Strategies Fund |
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A guide to understanding the Funds financial statements |
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Investment Portfolio
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The Investment Portfolio details all of the Funds holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of
concentration and diversification. |
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Statement of Assets and Liabilities
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This statement details the Funds assets, liabilities, net assets and common share price as of the last day of the reporting period. Net assets are calculated by subtracting all the Funds liabilities
(including any unpaid expenses) from
the total of the Funds investment and non-investment assets. The net asset value per common share is calculated by dividing net assets by the number of common shares outstanding as of the last day of the reporting period. |
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Statement of Operations
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This statement reports income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its
holdings during the period
as well as any unrealized gains or losses recognized over the period. The total of these results represents the Funds net increase or decrease in net assets from operations applicable to common shareholders. |
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Statements of Changes in Net Assets
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These statements detail how the Funds net assets were affected by its operating results, distributions to common shareholders and shareholder transactions from common shares (e.g., subscriptions, redemptions
and distribution reinvestments)
during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of common shares outstanding. |
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Statement of Cash Flows
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This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period. |
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Financial Highlights
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The Financial Highlights demonstrate how the Funds net asset value per common share was affected by the Funds operating results. The Financial Highlights also disclose the performance and certain key
ratios (e.g., net expenses and net
investment income as a percentage of average net assets). |
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Notes to Financial Statements
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These notes disclose the
organizational background of the Fund, its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax
information, fees and
compensation paid to affiliates and significant risks and contingencies. |
6 | Annual Report
INVESTMENT PORTFOLIO
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As of December 31, 2009
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Highland Credit Strategies Fund |
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Principal Amount ($) |
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Value ($) |
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US Senior Loans (a) 74.2% |
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AEROSPACE 3.0% |
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AWAS Capital, Inc. |
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1,577,370 |
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Second Lien Priority Term Facility,
6.25%, 03/15/13 |
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1,230,348 |
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Continental Airlines, Inc. |
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571,429 |
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Tranche A-1 Term Loan,
3.63%, 06/01/11 |
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542,857 |
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1,428,571 |
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Tranche A-2 Term Loan,
3.63%, 06/01/11 |
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1,357,143 |
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Delta Air Lines, Inc. |
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4,189,500 |
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Term Loan,
8.75%, 09/27/13 |
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4,192,118 |
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5,789,543 |
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Term Loan Equipment Notes,
3.75%, 09/29/12 |
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4,979,007 |
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IAP Worldwide Services, Inc. |
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2,179,701 |
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Second Lien Term Loan, PIK,
6.00%, 06/28/13 |
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1,563,935 |
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13,865,408 |
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BROADCASTING 7.1% |
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ComCorp Broadcasting, Inc. |
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3,584,549 |
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Revolving Loan, PIK,
9.00%, 10/03/12 (b) (c) |
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2,683,035 |
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35,860,392 |
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Term Loan, PIK,
9.00%, 04/03/13 (b) (c) |
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26,841,503 |
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Cumulus Media, Inc. |
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438,726 |
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Replacement Term Loan,
06/11/14 (d) |
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369,901 |
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Univision Communications, Inc. |
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3,000,000 |
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Initial Term Loan, 2.50%, 09/29/14 |
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2,613,750 |
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32,508,189 |
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CABLE/WIRELESS VIDEO 4.4% |
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Broadstripe, LLC |
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996,668 |
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DIP Revolver,
7.25%, 12/31/09 (c) (e) |
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993,678 |
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14,151,375 |
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First Lien Term Loan, PIK,
06/30/11 (c) (f) |
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11,464,029 |
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1,428,203 |
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Revolver,
06/30/11 (c) (f) |
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1,156,987 |
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Charter Communications
Operating, LLC |
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6,967,024 |
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New Term Loan, 2.26%,
03/06/14 (d) |
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6,544,161 |
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20,158,855 |
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CHEMICALS 1.6% |
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Solutia, Inc. |
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1,981,718 |
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Term Loan, 7.25%, 02/28/14 |
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2,016,903 |
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Texas Petrochemical, LP |
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1,321,848 |
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Incremental Term Loan B,
2.88%, 06/27/13 |
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1,192,968 |
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4,608,344 |
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Term B Loan,
2.88%, 06/27/13 |
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4,159,031 |
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7,368,902 |
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CONSUMER NON-DURABLES 1.7% |
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Revlon Consumer Products Corp. |
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8,125,000 |
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Term Loan, 4.26%, 01/15/12 |
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7,981,350 |
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DIVERSIFIED MEDIA 6.5% |
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Cengage Learning Acquisitions, Inc. |
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3,482,188 |
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Term Loan, 2.75%, 07/03/14 |
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3,175,756 |
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Cydcor, Inc. |
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6,829,480 |
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First Lien Tranche B Term Loan,
9.00%, 02/05/13 |
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6,436,785 |
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3,000,000 |
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Second Lien Tranche B Term Loan,
12.00%, 02/05/14 (c) |
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2,556,300 |
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DTN, Inc. |
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1,402,365 |
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Tranche C Term Loan, 5.25%,
03/10/13 |
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1,349,776 |
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Endurance Business Media, Inc. |
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3,000,000 |
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Second Lien Term Loan, 11.25%,
01/26/14 (f) |
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1,050,000 |
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Harland Clarke Holdings Corp. |
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4,932,162 |
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Tranche B Term Loan, 2.75%,
06/30/14 |
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4,116,605 |
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Metro-Goldwyn-Mayer, Inc. |
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14,144,530 |
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|
Tranche B Term Loan,
04/09/12 (d) (f) |
|
|
9,144,438 |
|
|
2,917,500 |
|
|
Tranche B-1 Term Loan,
04/09/12 (f) |
|
|
1,886,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,715,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ENERGY 3.4% |
|
|
|
|
|
|
|
|
Alon USA Energy, Inc. |
|
|
|
|
|
214,444 |
|
|
Edington Facility,
2.48%, 08/05/13 |
|
|
180,669 |
|
|
1,715,556 |
|
|
Paramount Facility,
2.49%, 08/05/13 |
|
|
1,445,356 |
|
|
|
|
|
Calumet Lubricants Co., LP |
|
|
|
|
|
197,380 |
|
|
Credit Linked Letter of Credit,
01/03/15 (d) |
|
|
174,681 |
|
|
1,465,487 |
|
|
Term Loan,
01/03/15 (d) |
|
|
1,296,956 |
|
|
|
|
|
Coffeyville Resources, LLC |
|
|
|
|
|
3,979,608 |
|
|
Tranche D Term Loan, 8.50%,
12/30/13 |
|
|
4,003,247 |
|
|
|
|
|
Venoco, Inc. |
|
|
|
|
|
9,340,080 |
|
|
Second Lien Loan, 4.25%,
05/07/14 |
|
|
8,438,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,539,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL 1.4% |
|
|
|
|
|
|
|
|
HUB International Ltd. |
|
|
|
|
|
3,990,000 |
|
|
Additional Term Loan,
6.75%, 06/13/14 |
|
|
3,963,407 |
|
|
182,588 |
|
|
Delayed Draw Term Loan,
2.75%, 06/13/14 |
|
|
167,981 |
|
|
812,313 |
|
|
Initial Term Loan,
2.75%, 06/13/14 |
|
|
747,328 |
|
|
|
|
|
Nuveen Investments, Inc. |
|
|
|
|
|
1,500,000 |
|
|
Second Lien Term Loan, 12.50%,
07/31/15 (d) (g) |
|
|
1,554,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,433,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD AND DRUG 0.6% |
|
|
|
|
|
|
|
|
Rite Aid Corp. |
|
|
|
|
|
994,937 |
|
|
Tranche 2 Term Loan,
1.99%, 06/04/14 |
|
|
883,006 |
|
|
985,015 |
|
|
Tranche 3 Term Loan,
6.00%, 06/04/14 |
|
|
929,608 |
|
|
750,000 |
|
|
Tranche 4 Term Loan,
9.50%, 06/10/15 |
|
|
778,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,590,818 |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 7
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
Value ($) |
|
US Senior Loans (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD/TOBACCO 3.4% |
|
|
|
|
|
|
|
|
DS Waters of America, Inc. |
|
|
|
|
|
1,828,889 |
|
|
Term Loan, 2.50%, 10/29/12 |
|
|
1,721,442 |
|
|
|
|
|
DSW Holdings, Inc. |
|
|
|
|
|
5,500,000 |
|
|
Term Loan, 4.25%, 03/02/12 (d) |
|
|
4,812,501 |
|
|
|
|
|
PBM Holdings, Inc. |
|
|
|
|
|
1,747,962 |
|
|
Term Loan, 2.49%, 09/28/12 |
|
|
1,651,824 |
|
|
|
|
|
Pierre Foods, Inc. |
|
|
|
|
|
950,000 |
|
|
Term Loan, 8.50%, 09/30/14 |
|
|
957,125 |
|
|
|
|
|
Sturm Foods, Inc. |
|
|
|
|
|
1,000,000 |
|
|
First Lien Initial Term Loan,
2.81%, 01/31/14 |
|
|
958,335 |
|
|
2,562,500 |
|
|
Second Lien Initial Term Loan,
6.31%, 07/31/14 |
|
|
2,250,733 |
|
|
|
|
|
WM. Bolthouse Farms, Inc. |
|
|
|
|
|
1,016,226 |
|
|
First Lien Term Loan,
5.50%, 12/16/12 |
|
|
991,075 |
|
|
2,500,000 |
|
|
Second Lien Term Loan,
9.00%, 12/16/13 |
|
|
2,380,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,723,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREST PRODUCTS/CONTAINERS 0.9% |
|
|
|
|
|
|
|
|
Consolidated Container Co., LLC |
|
|
|
|
|
2,000,000 |
|
|
Second Lien Term Loan,
09/28/14 (d) |
|
|
1,667,500 |
|
|
|
|
|
Newark Group, Inc. |
|
|
|
|
|
204,186 |
|
|
Credit-Link Letter of Credit,
6.74%, 03/09/13 |
|
|
178,663 |
|
|
1,638,559 |
|
|
Term Loan,
10.75%, 03/09/13 |
|
|
1,433,739 |
|
|
|
|
|
Tegrant Corp. |
|
|
|
|
|
1,000,000 |
|
|
Second Lien Term Loan,
5.76%, 03/08/15 |
|
|
617,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,897,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAMING/LEISURE 7.7% |
|
|
|
|
|
|
|
|
Drake Hotel Acquisition |
|
|
|
|
|
6,041,285 |
|
|
B Note 1 (c) (f) |
|
|
|
|
|
|
|
|
Fontainebleau Florida Hotel, LLC |
|
|
|
|
|
18,500,000 |
|
|
Tranche C Term Loan,
06/06/12 (f) |
|
|
6,105,000 |
|
|
|
|
|
Ginn LA Conduit Lender, Inc. |
|
|
|
|
|
3,937,249 |
|
|
First Lien Tranche A Credit-Linked
Deposit,
06/08/11 (f) |
|
|
280,529 |
|
|
8,438,203 |
|
|
First Lien Tranche B Term Loan,
06/08/11 (f) |
|
|
611,770 |
|
|
|
|
|
Green Valley Ranch Gaming, LLC |
|
|
|
|
|
1,000,000 |
|
|
Second Lien Term Loan, 3.50%,
08/16/14 |
|
|
216,250 |
|
|
|
|
|
Lake at Las Vegas Joint Venture |
|
|
|
|
|
159,286 |
|
|
Mezzanine, PIK,
06/20/12 (f) |
|
|
5,575 |
|
|
8,162,813 |
|
|
Revolving Loan Credit-Linked
Deposit Account,
06/20/12 (f) |
|
|
163,256 |
|
|
34,125,359 |
|
|
Term Loan, DIP,
7.73%, 04/30/10 |
|
|
13,650,144 |
|
|
88,933,097 |
|
|
Term Loan, PIK,
06/20/12 (f) |
|
|
1,284,507 |
|
|
|
|
|
Las Vegas Sands, LLC |
|
|
|
|
|
1,394,459 |
|
|
Delayed Draw I Term Loan,
2.01%, 05/23/14 |
|
|
1,225,701 |
|
|
6,901,510 |
|
|
Tranche B Term Loan,
2.01%, 05/23/14 |
|
|
6,066,289 |
|
|
|
|
|
MGM Mirage, Inc. |
|
|
|
|
|
2,000,000 |
|
|
Advance Term Loan,
10/03/11 (d) |
|
|
1,872,140 |
|
|
500,000 |
|
|
Revolver,
10/03/11 (d) |
|
|
437,500 |
|
|
|
|
|
VML US Finance, LLC |
|
|
|
|
|
1,115,135 |
|
|
Term B Delayed Draw Project Loan,
4.76%, 05/25/12 |
|
|
1,060,460 |
|
|
1,930,590 |
|
|
Term B Funded Project Loan,
4.76%, 05/27/13 |
|
|
1,835,933 |
|
|
|
|
|
WAICCS Las Vegas 3 LLC |
|
|
|
|
|
7,000,000 |
|
|
Second Lien Term Loan, 02/01/10 (f) |
|
|
700,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,515,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEALTHCARE 2.5% |
|
|
|
|
|
|
|
|
Aveta, Inc. |
|
|
|
|
|
2,064,687 |
|
|
MMM Original Term Loan,
5.49%, 08/22/11 |
|
|
2,027,275 |
|
|
306,719 |
|
|
NAMM New Term Loan,
5.49%, 08/22/11 |
|
|
301,161 |
|
|
552,693 |
|
|
NAMM Original Term Loan,
5.49%, 08/22/11 |
|
|
542,678 |
|
|
1,692,058 |
|
|
PHMC Acquisition Term Loan,
5.49%, 08/22/11 |
|
|
1,661,398 |
|
|
|
|
|
LifeCare Holdings |
|
|
|
|
|
5,352,637 |
|
|
Term Loan, 4.54%, 08/10/12 |
|
|
4,567,592 |
|
|
|
|
|
Rehabcare Group, Inc. |
|
|
|
|
|
500,000 |
|
|
Term Loan B, 6.00%, 11/24/15 |
|
|
496,095 |
|
|
|
|
|
Warner Chilcott Co., LLC |
|
|
|
|
|
644,068 |
|
|
Term A Loan,
5.50%, 10/30/14 |
|
|
645,775 |
|
|
322,034 |
|
|
Term B-1 Loan,
5.75%, 04/30/15 |
|
|
322,887 |
|
|
708,475 |
|
|
Term B-2 Loan,
5.75%, 04/30/15 |
|
|
710,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,275,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOUSING 3.8% |
|
|
|
|
|
|
|
|
Custom Building Products, Inc. |
|
|
|
|
|
2,814,826 |
|
|
First Lien Term Loan,
8.00%, 10/29/11 |
|
|
2,772,604 |
|
|
3,981,250 |
|
|
Second Lien Term Loan,
10.75%, 04/20/12 |
|
|
3,817,023 |
|
|
|
|
|
LBREP/L-Suncal Master I, LLC |
|
|
|
|
|
3,190,581 |
|
|
First Lien Term Loan, 01/18/10 (f) |
|
|
95,717 |
|
|
|
|
|
Pacific Clarion, LLC |
|
|
|
|
|
24,752,866 |
|
|
Term Loan (c) (f) (g) |
|
|
3,804,515 |
|
|
|
|
|
Roofing Supply Group, LLC |
|
|
|
|
|
3,144,742 |
|
|
Term Loan, PIK, 7.25%, 08/24/13 |
|
|
2,948,196 |
|
|
|
|
|
Westgate Investments, LLC |
|
|
|
|
|
8,144,811 |
|
|
Senior Secured Loan, PIK,
09/25/10 (f) (g) |
|
|
2,716,737 |
|
|
2,336,387 |
|
|
Senior Unsecured Loan, PIK,
09/25/12 (f) |
|
|
558,770 |
|
|
3,743,195 |
|
|
Third Lien Term Loan, PIK,
06/30/15 (f) (g) |
|
|
535,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,249,401 |
|
|
|
|
|
|
|
|
|
|
8 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
Value ($) |
|
US Senior Loans (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION TECHNOLOGY 3.2% |
|
|
|
|
|
|
|
|
CDW Corp. |
|
|
|
|
|
6,906,265 |
|
|
Term Loan, 4.23%, 10/10/14 (d) |
|
|
5,964,320 |
|
|
|
|
|
Kronos, Inc. |
|
|
|
|
|
2,933,735 |
|
|
First Lien Initial Term Loan,
2.25%, 06/11/14 |
|
|
2,739,375 |
|
|
|
|
|
Serena Software, Inc. |
|
|
|
|
|
1,696,000 |
|
|
Term Loan, 2.26%, 03/11/13 |
|
|
1,561,380 |
|
|
|
|
|
SunGard Data Systems, Inc. |
|
|
|
|
|
1,989,924 |
|
|
Incremental Term Loan,
6.75%, 02/28/14 |
|
|
2,011,485 |
|
|
|
|
|
Verint Systems, Inc. |
|
|
|
|
|
2,483,246 |
|
|
Term Loan, 3.49%, 05/25/14 |
|
|
2,295,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,572,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING 2.4% |
|
|
|
|
|
|
|
|
Acument Global Technologies, Inc. |
|
|
|
|
|
6,425,243 |
|
|
Term Loan, 10.00%, 08/11/13 |
|
|
4,481,607 |
|
|
|
|
|
Brand Energy & Infrastructure
Services, Inc. |
|
|
|
|
|
1,500,000 |
|
|
Second Lien Term Loan,
02/07/15 (d) |
|
|
1,261,875 |
|
|
|
|
|
Dana Holding Corp. |
|
|
|
|
|
2,763,670 |
|
|
Term Advance, 7.25%, 01/30/15 (d) |
|
|
2,651,395 |
|
|
|
|
|
Gentek Holding, LLC |
|
|
|
|
|
1,500,000 |
|
|
Tranche B Term Loan, 7.00%,
10/29/14 |
|
|
1,518,188 |
|
|
|
|
|
United Central Industrial Supply
Co., LLC |
|
|
|
|
|
1,269,467 |
|
|
Term Loan, 2.48%, 03/31/12 |
|
|
1,215,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,128,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
METALS/MINERALS 0.4% |
|
|
|
|
|
|
|
|
Euramax International, Inc. |
|
|
|
|
|
1,454,449 |
|
|
Domestic Term Loan (Cash Pay),
10.00%, 06/29/13 |
|
|
973,026 |
|
|
1,450,776 |
|
|
Domestic Term Loan, PIK,
3.00%, 06/29/13 |
|
|
970,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,943,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAIL 3.2% |
|
|
|
|
|
|
|
|
Burlington Coat Factory Warehouse
Corp. |
|
|
|
|
|
5,958,670 |
|
|
Term Loan, 2.51%, 05/28/13 (d) |
|
|
5,547,165 |
|
|
|
|
|
Guitar Center, Inc. |
|
|
|
|
|
1,474,242 |
|
|
Term Loan, 3.74%, 10/09/14 (d) |
|
|
1,254,426 |
|
|
|
|
|
Michaels Stores, Inc. |
|
|
|
|
|
1,629,943 |
|
|
B-1 Term Loan,
2.56%, 10/31/13 |
|
|
1,484,601 |
|
|
2,193,536 |
|
|
B-2 Term Loan,
4.81%, 07/31/16 |
|
|
2,077,695 |
|
|
|
|
|
Spirit Finance Corp. |
|
|
|
|
|
6,500,000 |
|
|
Term Loan, 3.28%, 08/01/13 |
|
|
4,363,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,727,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICE 4.4% |
|
|
|
|
|
|
|
|
CCS, Inc. |
|
|
|
|
|
2,986,924 |
|
|
Term Loan, 3.23%, 11/14/14 |
|
|
2,506,522 |
|
|
|
|
|
First Data Corp. |
|
|
|
|
|
1,488,579 |
|
|
Initial Tranche B-1 Term Loan,
2.98%, 09/24/14 |
|
|
1,326,696 |
|
|
|
|
|
NES Rentals Holdings, Inc. |
|
|
|
|
|
3,224,820 |
|
|
Second Lien Permanent Term Loan,
7.13%, 07/20/13 |
|
|
2,329,932 |
|
|
|
|
|
Penhall Holding Co. |
|
|
|
|
|
9,991,289 |
|
|
Term Loan, PIK, 9.63%, 04/01/12 |
|
|
549,520 |
|
|
|
|
|
Sabre, Inc. |
|
|
|
|
|
7,000,000 |
|
|
Initial Term Loan, 2.49%, 09/30/14 |
|
|
6,347,495 |
|
|
|
|
|
Safety-Kleen Systems, Inc. |
|
|
|
|
|
1,627,119 |
|
|
Synthetic Letter of Credit,
2.75%, 08/02/13 |
|
|
1,509,153 |
|
|
6,034,576 |
|
|
Term B Loan,
2.75%, 08/02/13 |
|
|
5,597,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,166,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELECOMMUNICATIONS 3.2% |
|
|
|
|
|
|
|
|
Avaya, Inc. |
|
|
|
|
|
6,974,360 |
|
|
Term Loan, 3.01%, 10/24/14 |
|
|
6,053,187 |
|
|
|
|
|
Intergra Telecom Holdings, Inc. |
|
|
|
|
|
997,449 |
|
|
First Lien Term Loan, 08/31/13 (d) |
|
|
1,002,745 |
|
|
|
|
|
Level 3 Financing, Inc. |
|
|
|
|
|
6,000,000 |
|
|
Tranche A Term Loan,
2.53%, 03/13/14 |
|
|
5,465,010 |
|
|
|
|
|
Springboard Finance, LLC |
|
|
|
|
|
2,000,000 |
|
|
Dollar Term Loan, 9.00%, 11/19/14 |
|
|
2,057,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,578,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION AUTOMOTIVE 2.5% |
|
|
|
|
|
|
|
|
BST Safety Textiles Acquisition GMBH |
|
|
|
|
|
3,597,929 |
|
|
Second Lien Facility, 06/30/10 (c) (f) |
|
|
|
|
|
|
|
|
Federal-Mogul Corp. |
|
|
|
|
|
1,981,432 |
|
|
Tranche B Term Loan,
2.17%, 12/29/14 |
|
|
1,671,833 |
|
|
1,010,935 |
|
|
Tranche C Term Loan,
2.17%, 12/28/15 |
|
|
852,976 |
|
|
|
|
|
Ford Motor Co. |
|
|
|
|
|
3,984,637 |
|
|
Tranche B-1 Term Loan,
3.29%, 12/15/13 |
|
|
3,692,901 |
|
|
|
|
|
Motor Coach Industries International, Inc. |
|
|
|
|
|
5,970,085 |
|
|
Second Lien Tranche A,
11.75%, 06/30/12 (c) |
|
|
3,223,249 |
|
|
3,678,190 |
|
|
Second Lien Tranche B,
11.75%, 06/30/12 (c) |
|
|
1,985,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,426,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION LAND TRANSPORTATION 0.7% |
|
|
|
|
|
|
|
|
New Century Transportation, Inc. |
|
|
|
|
|
1,824,061 |
|
|
Term Loan, 7.24%, 08/14/12 |
|
|
1,586,933 |
|
|
|
|
|
SIRVA Worldwide, Inc. |
|
|
|
|
|
746,073 |
|
|
Revolving Credit Loan (Exit Finance),
10.00%, 05/12/12 (e) |
|
|
376,767 |
|
|
3,376,227 |
|
|
Second Lien Term Loan, PIK,
12.00%, 05/12/15 |
|
|
506,434 |
|
|
1,515,969 |
|
|
Term Loan (Exit Finance),
9.50%, 05/12/12 |
|
|
757,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,228,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTILITY 4.1% |
|
|
|
|
|
|
|
|
Calpine Corp. |
|
|
|
|
|
1,153,533 |
|
|
First Priority Term Loan,
3.14%, 03/29/14 |
|
|
1,095,978 |
|
See accompanying Notes to Financial Statements. | 9
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
Value ($) |
|
UTILITY (continued) |
|
|
|
|
|
|
|
|
Coleto Creek Power, LP |
|
|
|
|
|
184,651 |
|
|
First Lien Synthetic Letter of Credit,
3.00%, 06/28/13 |
|
|
166,186 |
|
|
2,525,391 |
|
|
First Lien Term Loan,
3.00%, 06/28/13 |
|
|
2,290,214 |
|
|
4,825,000 |
|
|
Second Lien Term Loan,
4.23%, 06/28/13 |
|
|
3,552,406 |
|
|
|
|
|
Entegra TC LLC |
|
|
|
|
|
10,178,952 |
|
|
Third Lien Term Loan, PIK,
6.25%, 10/19/15 |
|
|
4,509,276 |
|
|
|
|
|
GBGH, LLC |
|
|
|
|
|
2,202,643 |
|
|
First Lien Term Loan,
4.00%, 06/09/13 (c) |
|
|
1,758,811 |
|
|
706,213 |
|
|
Second Lien Term Loan,
12.00%, 06/09/14 (c) |
|
|
486,581 |
|
|
|
|
|
Texas Competitive Electric
Holdings Co., LLC |
|
|
|
|
|
5,964,415 |
|
|
Initial Tranche B-2 Term Loan,
3.73%, 10/10/14 |
|
|
4,859,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,718,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WIRELESS COMMUNICATIONS 2.1% |
|
|
|
|
|
|
|
|
Digicel International Finance Ltd. |
|
|
|
|
|
3,500,000 |
|
|
Tranche A T&T,
09/30/12 (d) |
|
|
3,368,750 |
|
|
3,750,075 |
|
|
Tranche A Term Loan,
2.81%, 03/30/12 |
|
|
3,609,447 |
|
|
|
|
|
MetroPCS Wireless, Inc. |
|
|
|
|
|
2,984,576 |
|
|
Tranche B Term Loan,
2.54%, 11/03/13 |
|
|
2,862,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,840,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total US Senior Loans
(Cost $533,618,705) |
|
|
340,153,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
|
|
Foreign Denominated Senior Loans (a) 3.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
AUSTRALIA 3.9% |
|
|
|
|
AUD |
|
|
|
|
|
|
|
|
SMG H5 Property Ltd. |
|
|
|
|
|
22,870,278 |
|
|
Facility A Term Loan,
6.21%, 12/24/12 |
|
|
17,997,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign Denominated
Senior Loans
(Cost $18,570,363) |
|
|
17,997,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
|
|
Asset-Backed Securities (h) 6.9% |
|
|
|
|
|
|
|
|
AB CLO, Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-1A, Class C,
2.13%, 04/15/21 (c) (i) |
|
|
1,385,232 |
|
|
|
|
|
ACA CLO, Ltd. |
|
|
|
|
|
4,000,000 |
|
|
Series 2006-2A, Class B,
1.00%, 01/20/21 (i) |
|
|
2,120,000 |
|
|
2,000,000 |
|
|
Series 2007-1A, Class D,
2.63%, 06/15/22 (i) |
|
|
850,000 |
|
|
|
|
|
Babson CLO, Ltd. |
|
|
|
|
|
1,000,000 |
|
|
Series 2007-2A, Class D,
1.98%, 04/15/21 (i) |
|
|
450,000 |
|
|
|
|
|
Bluemountain CLO, Ltd. |
|
|
|
|
|
1,000,000 |
|
|
Series 2007-3A, Class D,
1.65%, 03/17/21 (c) (i) |
|
|
524,766 |
|
|
|
|
|
Cent CDO, Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-15A, Class C,
2.51%, 03/11/21 (i) |
|
|
902,800 |
|
|
|
|
|
Columbus Nova CLO, Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007- 1A, Class D,
1.62%, 05/16/19 (i) |
|
|
1,085,000 |
|
|
|
|
|
Commercial Industrial Finance Corp. |
|
|
|
|
|
1,000,000 |
|
|
Series 2006-1BA, Class B2L,
4.25%, 12/22/20 |
|
|
388,100 |
|
|
962,970 |
|
|
Series 2006-2A, Class B2L,
4.26%, 03/01/21 (i) |
|
|
319,514 |
|
|
|
|
|
Cornerstone CLO, Ltd. |
|
|
|
|
|
2,500,000 |
|
|
Series 2007-1A, Class C,
2.68%, 07/15/21 (i) |
|
|
1,287,500 |
|
|
|
|
|
Goldman Sachs Asset Management
CLO PLC |
|
|
|
|
|
4,000,000 |
|
|
Series 2007-1A, Class D,
3.03%, 08/01/22 (i) |
|
|
1,820,000 |
|
|
1,066,984 |
|
|
Series 2007-1A, Class E,
08/01/22 (f) (i) |
|
|
234,736 |
|
|
|
|
|
Greywolf CLO, Ltd |
|
|
|
|
|
1,000,000 |
|
|
Series 2007-1A, Class D,
1.77%, 02/18/21 (i) |
|
|
430,000 |
|
|
814,466 |
|
|
Series 2007-1A, Class E,
4.22%, 02/18/21 (i) |
|
|
358,365 |
|
|
|
|
|
GSC Partners CDO Fund, Ltd. |
|
|
|
|
|
3,000,000 |
|
|
Series 2007-8A, Class C,
1.76%, 04/17/21 (i) |
|
|
712,200 |
|
|
|
|
|
Gulf Stream Sextant CLO, Ltd. |
|
|
|
|
|
1,013,186 |
|
|
Series 2007-1A, Class D,
2.65%, 06/17/21 (i) |
|
|
486,329 |
|
|
|
|
|
Hillmark Funding |
|
|
|
|
|
2,000,000 |
|
|
Series 2006-1A, Class C,
1.97%, 05/21/21 (i) |
|
|
942,500 |
|
|
612,103 |
|
|
Series 2006-1A, Class D,
3.87%, 05/21/21 (i) |
|
|
244,841 |
|
|
|
|
|
Inwood Park CDO, Ltd. |
|
|
|
|
|
1,000,000 |
|
|
Series 2006-1A, Class C,
0.98%, 01/20/21 (i) |
|
|
780,000 |
|
|
1,000,000 |
|
|
Series 2006-1A, Class D,
1.68%, 01/20/21 (i) |
|
|
700,000 |
|
|
|
|
|
Limerock CLO |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-1A, Class D,
3.63%, 04/24/23 (i) |
|
|
600,000 |
|
|
|
|
|
Madison Park Funding Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-5A, Class C,
1.71%, 02/26/21 (i) |
|
|
833,400 |
|
|
1,500,000 |
|
|
Series 2007-5A, Class D,
3.76%, 02/26/21 (i) |
|
|
514,500 |
|
|
|
|
|
Marquette US/European CLO, PLC |
|
|
|
|
|
1,000,000 |
|
|
Series 2006-1A, Class D1,
2.03%, 07/15/20 (i) |
|
|
275,000 |
|
|
|
|
|
Navigator CDO, Ltd. |
|
|
|
|
|
1,005,684 |
|
|
Series 2006-2A, Class D,
09/20/20 (f) (i) |
|
|
553,126 |
|
|
|
|
|
Ocean Trails CLO |
|
|
|
|
|
1,000,000 |
|
|
Series 2006-1A, Class D,
4.03%, 10/12/20 (i) |
|
|
369,950 |
|
|
2,500,000 |
|
|
Series 2007-2A, Class C,
2.63%, 06/27/22 (i) |
|
|
1,275,000 |
|
|
|
|
|
PPM Grayhawk CLO, Ltd. |
|
|
|
|
|
1,000,000 |
|
|
Series 2007-1A, Class C,
1.68%, 04/18/21 (i) |
|
|
419,000 |
|
|
826,734 |
|
|
Series 2007-1A, Class D,
04/18/21 (f) (i) |
|
|
287,042 |
|
10 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
Value ($) |
|
|
|
|
|
Primus CLO, Ltd. |
|
|
|
|
|
5,126,536 |
|
|
Series 2007-2A, Class D,
07/15/21 (f) (i) |
|
|
1,999,349 |
|
|
2,087,069 |
|
|
Series 2007-2A, Class E,
07/15/21 (f) (i) |
|
|
521,767 |
|
|
|
|
|
Rampart CLO, Ltd. |
|
|
|
|
|
4,000,000 |
|
|
Series 2006-1A, Class C,
1.73%, 04/18/21 (i) |
|
|
2,006,400 |
|
|
|
|
|
St. James River CLO, Ltd. |
|
|
|
|
|
2,391,870 |
|
|
Series 2007-1A, Class E,
4.56%, 06/11/21 (i) |
|
|
837,155 |
|
|
|
|
|
Stanfield Daytona CLO, Ltd. |
|
|
|
|
|
1,200,000 |
|
|
Series 2007-1A, Class B1L,
1.63%, 04/27/21 (i) |
|
|
576,000 |
|
|
|
|
|
Stanfield McLaren CLO, Ltd. |
|
|
|
|
|
4,000,000 |
|
|
Series 2007-1A, Class B1L,
2.66%, 02/27/21 (i) |
|
|
1,840,000 |
|
|
|
|
|
Stone Tower CLO, Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-6A, Class C,
1.63%, 04/17/21 (i) |
|
|
960,000 |
|
|
|
|
|
Venture CDO, Ltd. |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-9A, Class D,
4.43%, 10/12/21 (i) |
|
|
1,012,500 |
|
|
|
|
|
Westbrook CLO, Ltd. |
|
|
|
|
|
1,000,000 |
|
|
Series 2006-1A, Class D,
1.95%, 12/20/20 (i) |
|
|
510,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset-Backed Securities
(Cost $49,548,858) |
|
|
31,412,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Asset-Backed Securities (h) 0.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
|
|
IRELAND 0.5% |
|
|
|
|
EUR |
|
|
|
|
|
|
|
|
Static Loan Funding |
|
|
|
|
|
2,000,000 |
|
|
Series 2007-1X, Class D,
5.65%, 07/31/17 (i) |
|
|
1,334,309 |
|
|
2,000,000 |
|
|
Series 2007-1X, Class E,
8.15%, 07/31/17 (i) |
|
|
1,076,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign Asset-Backed Securities
(Cost $5,669,662) |
|
|
2,410,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
|
|
Corporate Notes and Bonds 27.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
AEROSPACE 0.6% |
|
|
|
|
|
|
|
|
Delta Air Lines, Inc. |
|
|
|
|
|
5,000,000 |
|
|
06/30/23 (f) |
|
|
73,000 |
|
|
7,000,000 |
|
|
12/15/29 (f) |
|
|
115,500 |
|
|
1,000,000 |
|
|
9.50%, 09/15/14 (i) |
|
|
1,043,750 |
|
|
|
|
|
Northwest Airlines Corp. |
|
|
|
|
|
2,500,000 |
|
|
12/30/27 (f) |
|
|
19,000 |
|
|
|
|
|
Northwest Airlines, Inc. |
|
|
|
|
|
1,498,064 |
|
|
9.06%, 05/20/12 |
|
|
1,318,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,569,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROADCASTING 0.0% |
|
|
|
|
|
|
|
|
Young Broadcasting, Inc. |
|
|
|
|
|
3,065,000 |
|
|
03/01/11 (f) (j) |
|
|
10,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHEMICALS 0.6% |
|
|
|
|
|
|
|
|
Berry Plastics Holding Corp. |
|
|
|
|
|
3,000,000 |
|
|
8.88%, 09/15/14 |
|
|
2,932,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVERSIFIED MEDIA 1.0% |
|
|
|
|
|
|
|
|
Baker & Taylor, Inc. |
|
|
|
|
|
8,300,000 |
|
|
11.50%, 07/01/13 (i) |
|
|
4,513,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL 0.5% |
|
|
|
|
|
|
|
|
Penhall International Corp. |
|
|
|
|
|
3,500,000 |
|
|
12.00%, 08/01/14 (i) |
|
|
2,213,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD AND DRUG 0.5% |
|
|
|
|
|
|
|
|
Rite Aid Corp. |
|
|
|
|
|
2,000,000 |
|
|
10.38%, 07/15/16 |
|
|
2,130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOD/TOBACCO 0.4% |
|
|
|
|
|
|
|
|
Dole Foods Company, Inc. |
|
|
|
|
|
2,000,000 |
|
|
8.00%, 10/01/16 (i) |
|
|
2,040,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREST PRODUCTS/CONTAINERS 0.0% |
|
|
|
|
|
|
|
|
NewPage Holding Corp., PIK |
|
|
|
|
|
341,479 |
|
|
7.56%, 11/01/13 (h) |
|
|
104,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAMING/LEISURE 0.4% |
|
|
|
|
|
|
|
|
MGM Mirage, Inc. |
|
|
|
|
|
2,000,000 |
|
|
6.75%, 04/01/13 |
|
|
1,735,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEALTHCARE 16.0% |
|
|
|
|
|
|
|
|
Argatroban Royalty Sub LLC |
|
|
|
|
|
9,041,634 |
|
|
18.50%, 09/21/14 (i) |
|
|
8,137,471 |
|
|
|
|
|
Azithromycin Royalty Sub LLC |
|
|
|
|
|
15,000,000 |
|
|
16.00%, 05/15/19 (i) |
|
|
11,550,000 |
|
|
|
|
|
Celtic Pharma Phinco B.V., PIK |
|
|
|
|
|
52,617,143 |
|
|
17.00%, 06/15/12 (i) |
|
|
31,570,286 |
|
|
|
|
|
Cinacalcet Royalty Sub LLC |
|
|
|
|
|
270,520 |
|
|
8.00%, 03/30/17 (i) |
|
|
286,751 |
|
|
|
|
|
Fosamprenavir Pharma |
|
|
|
|
|
3,863,129 |
|
|
15.50%, 06/15/18 (i) |
|
|
3,554,079 |
|
|
|
|
|
Molecular Insight
Pharmaceuticals, Inc., PIK |
|
|
|
|
|
3,954,541 |
|
|
8.48%, 11/01/12 (i) (h) |
|
|
1,779,543 |
|
|
|
|
|
Pharma IV (Eszopiclone) |
|
|
|
|
|
2,237,922 |
|
|
12.00%, 06/30/14 (i) |
|
|
1,946,992 |
|
|
|
|
|
Pharma V (Duloxetine) |
|
|
|
|
|
800,000 |
|
|
13.00%, 10/15/13 (i) |
|
|
768,000 |
|
|
|
|
|
TCD Pharma |
|
|
|
|
|
15,500,000 |
|
|
16.00%, 04/15/24 (i) |
|
|
13,640,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,233,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION TECHNOLOGY 0.1% |
|
|
|
|
|
|
|
|
Charys Holding Co., Inc. |
|
|
|
|
|
5,000,000 |
|
|
02/16/12 (c) (f) |
|
|
|
|
|
|
|
|
Magnachip Semiconductor |
|
|
|
|
|
385,679 |
|
|
12/15/11 (f) (h) (j) |
|
|
194,999 |
|
|
|
|
|
New Holding, Inc. |
|
|
|
|
|
477,689 |
|
|
03/12/13 (c) (f) |
|
|
173,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANUFACTURING 0.9% |
|
|
|
|
|
|
|
|
Polypore, Inc. |
|
|
|
|
|
4,000,000 |
|
|
8.75%, 05/15/12 |
|
|
4,000,000 |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 11
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Principal Amount ($) |
|
|
Value ($) |
Corporate Notes and Bonds (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAIL 0.3% |
|
|
|
|
|
|
|
|
Burlington Coat Factory |
|
|
|
|
|
500,000 |
|
|
11.13%, 04/15/14 (j) |
|
|
518,750 |
|
|
|
|
|
Nebraska Book Co., Inc. |
|
|
|
|
|
1,000,000 |
|
|
10.00%, 12/01/11 (i) |
|
|
1,017,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,536,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION AUTOMOTIVE 2.1% |
|
|
|
|
|
|
|
|
American Tire Distributors Holdings, Inc. |
|
|
|
|
|
11,500,000 |
|
|
6.54%, 04/01/12 (h) |
|
|
9,602,500 |
|
|
|
|
|
Delphi Corp. |
|
|
|
|
|
3,750,000 |
|
|
05/01/10 (f) |
|
|
56,250 |
|
|
3,933,000 |
|
|
06/15/10 (f) |
|
|
58,995 |
|
|
8,334,000 |
|
|
05/01/29 (f) (j) |
|
|
125,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,842,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTILITY 1.0% |
|
|
|
|
|
|
|
|
Calpine Corp. |
|
|
|
|
|
2,795,000 |
|
|
7.25%, 10/15/17 (i) |
|
|
2,697,175 |
|
|
|
|
|
Kiowa Power |
|
|
|
|
|
2,000,000 |
|
|
5.74%, 03/30/21 (i) |
|
|
1,890,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,587,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WIRELESS COMMUNICATIONS 3.1% |
|
|
|
|
|
|
|
|
Digicel Group, Ltd., PIK |
|
|
|
|
|
14,492,000 |
|
|
9.13%, 01/15/15 (i) |
|
|
14,347,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Corporate Notes and Bonds
(Cost $179,894,490) |
|
|
126,164,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims (k) 0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL 0.1% |
|
|
|
|
|
|
|
|
Lehman Brothers Holding, Inc. |
|
|
|
|
|
1,198,046 |
|
|
Trade Claims LBSF |
|
|
431,297 |
|
|
|
|
|
|
|
|
|
|
RETAIL 0.0% |
|
|
|
|
|
|
|
|
Home Interiors & Gifts, Inc. |
|
|
|
|
|
6,933,961 |
|
|
Proof of Claims (c) |
|
|
10,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Claims
(Cost $5,595,198) |
|
|
441,698 |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
Common Stocks (k) 9.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
AEROSPACE 0.0% |
|
|
|
|
|
3,948 |
|
|
Delta Air Lines, Inc. |
|
|
44,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BROADCASTING 0.0% |
|
|
|
|
|
2,010,616 |
|
|
Communications Corp. of America (b) (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,757 |
|
|
Gray Television, Inc., Class A |
|
|
87,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVERSIFIED MEDIA 0.2% |
|
|
|
|
|
46,601 |
|
|
American Banknote Corp. (c) |
|
|
765,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEALTHCARE 8.4% |
|
|
|
|
|
395,838 |
|
|
Dfine, Inc. (c) |
|
|
395,838 |
|
|
24,000,000 |
|
|
Genesys Ventures IA, LP (b) (c) |
|
|
38,160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,555,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOUSING 0.0% |
|
|
|
|
|
8 |
|
|
Westgate Investments LLC, Class B-1 (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INFORMATION TECHNOLOGY 0.0% |
|
|
|
|
|
9,342 |
|
|
New Holding, Inc. (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
METALS/MINERALS 0.1% |
|
|
|
|
|
7,579 |
|
|
Euramax International, Inc. (c) |
|
|
454,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAIL 0.2% |
|
|
|
|
|
105,092 |
|
|
Sally Beauty Holdings, Inc. |
|
|
803,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICE 0.3% |
|
|
|
|
|
200,964 |
|
|
Safety-Kleen Systems, Inc. (c) |
|
|
1,406,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TELECOMMUNICATIONS 0.0% |
|
|
|
|
|
1 |
|
|
Viatel Holding (Bermuda) Ltd. |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION AUTOMOTIVE 0.0% |
|
|
|
|
|
1,544,148 |
|
|
Delphi Corp. (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSPORTATION LAND TRANSPORTATION 0.2% |
|
|
|
|
|
18,022 |
|
|
SIRVA Worldwide, Inc. (c) |
|
|
937,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTILITY 0.0% |
|
|
|
|
|
81,194 |
|
|
Entegra TC LLC |
|
|
182,687 |
|
|
4,365 |
|
|
GBGH LLC (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WIRELESS COMMUNICATIONS 0.4% |
|
|
|
|
|
1,772,064 |
|
|
ICO Global Communications Holding Ltd. |
|
|
1,913,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stocks
(Cost $63,057,446) |
|
|
45,152,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stocks (k) 2.8% |
|
|
|
|
|
1,000,000 |
|
|
Adelphia Recovery Trust (c) |
|
|
5,000 |
|
|
2,150,537 |
|
|
Dfine, Inc., Series D (c) |
|
|
12,774,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Stocks
(Cost $10,934,997) |
|
|
12,779,190 |
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
|
Warrants (k) 0.2% |
|
|
|
|
|
20,000 |
|
|
Clearwire Corp., expires 08/15/10 |
|
|
700 |
|
|
1,271 |
|
|
GBGH LLC, expires 06/09/14 (c) |
|
|
|
|
|
1,000 |
|
|
Grande Communications, expires 04/01/11 (c) |
|
|
|
|
|
49,317 |
|
|
IAP Worldwide Services, Inc., Series A, expires 06/12/15 (c) |
|
|
|
|
|
14,444 |
|
|
IAP Worldwide Services, Inc., Series B, expires 06/12/15 (c) |
|
|
|
|
|
7,312 |
|
|
IAP Worldwide Services, Inc., Series C, expires 06/12/15 (c) |
|
|
|
|
12 | See accompanying Notes to Financial Statements.
INVESTMENT PORTFOLIO (continued)
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
|
|
Units |
|
|
|
Value ($) |
Warrants (k) (continued) |
|
|
|
|
|
643,777 |
|
|
Microvision, Inc., expires 07/23/13 |
|
|
907,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants
(Cost $10) |
|
|
|
|
|
|
|
|
|
|
|
908,426 |
|
|
|
|
|
|
|
|
|
|
Total Investments 125.9%
|
|
|
|
|
(Cost of $866,889,729) (l) |
|
|
577,419,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets & Liabilities, Net (25.9)% |
|
|
(118,655,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets applicable to Common Shareholders 100.0% |
|
|
458,763,845 |
|
|
|
|
|
|
|
|
|
|
The amount of $1,250,615 in cash was segregated with
the brokers and/or custodian to cover investments sold
short outstanding as of December 31, 2009 and is
included in Other Assets & Liabilities, Net:
|
|
|
|
|
Short Sales 0.3% |
|
|
|
|
|
EQUITY SECURITY 0.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
RETAIL 0.3% |
|
|
|
|
|
87,311 |
|
|
Ethan Allen Interiors, Inc. |
|
|
1,171,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments sold short
(Proceeds $1,178,072) |
|
|
1,171,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Senior loans (also called bank loans, leveraged loans,
or floating rate loans) in which the Fund invests,
generally pay interest at rates which are periodically
determined by reference to a base lending rate plus a
spread. (Unless otherwise identified by footnote (g), all
senior loans carry a variable rate interest.) These base
lending rates are generally (i) the Prime Rate offered by
one or more major United States banks, (ii) the lending
rate offered by one or more European banks such as the
London Interbank Offered Rate (LIBOR) or (iii) the
Certificate of Deposit rate.
Rate shown represents the weighted average rate at
December 31, 2009. Senior loans, while exempt from
registration under the Securities Act of 1933 (the 1933
Act), contain certain restrictions on resale and cannot
be sold publicly. Senior secured floating rate loans
often require prepayments from excess cash flow or permit
the borrower to repay at its election. The degree to
which borrowers repay, whether a contractual requirement
or at their election, cannot be predicted with accuracy.
As a result, the actual maturity may be substantially
less than the stated maturity shown. |
|
(b) |
|
Affiliated issuers. See Note 10. |
|
(c) |
|
Represents fair value as determined by the Funds
Board of Trustees (the Board) or its designee in good
faith, pursuant to the policies and procedures approved by
the Board. Securities with a total aggregate market value
of $113,946,814, or 24.8% of net assets, were fair valued
under the fair value procedures as of December 31, 2009. |
|
(d) |
|
All or a portion of this position has not settled.
Full contract rates do not take effect until settlement
date. |
|
(e) |
|
Senior Loan assets had additional unfunded loan commitments.
See Note 9. |
|
(f) |
|
The issuer is in default of its payment obligation.
Income is not being accrued. |
|
(g) |
|
Fixed rate senior loan. |
|
(h) |
|
Floating rate asset. The interest rate shown
reflects the rate in effect at December 31, 2009. |
|
(i) |
|
Securities exempt from registration under Rule 144A of the 1933 Act.
These securities may only be resold, in transactions exempt from
registration, to qualified institutional buyers. At December 31, 2009,
these securities amounted to $136,430,075 or 29.7% of net assets. |
|
(j) |
|
Securities (or a portion of securities) on loan. See Note 8. |
|
(k) |
|
Non-income producing security. |
|
(l) |
|
Cost for U.S. federal income tax purposes is $874,196,213. |
|
AUD |
|
Australian Dollar |
|
EUR |
|
Euro Currency |
|
GBP |
|
Great Britain Pound |
|
CDO |
|
Collateralized Debt Obligation |
|
CLO |
|
Collateralized Loan Obligation |
|
DIP |
|
Debtor-in-Possession |
|
PIK |
|
Payment-in-Kind |
Foreign Denominated Senior Loans &
Asset Backed Securities
Industry Concentration Table:
(% of Net Assets)
|
|
|
|
|
Diversified Media |
|
|
3.9 |
% |
Financial |
|
|
0.5 |
% |
|
|
|
|
|
Total |
|
|
4.4 |
% |
|
|
|
|
|
Forward foreign currency contracts outstanding as of
December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
Contracts |
|
|
|
|
|
Amount |
|
|
|
|
|
|
Net |
|
to Buy or |
|
|
|
|
|
Covered by |
|
|
|
|
|
|
Unrealized |
|
to Sell |
|
Currency |
|
|
Contracts |
|
|
Expiration |
|
|
Appreciation |
|
Sell |
|
EUR |
|
|
35,000 |
|
|
|
02/03/10 |
|
|
$ |
204 |
|
Sell |
|
EUR |
|
|
1,665,000 |
|
|
|
05/14/10 |
|
|
|
107,340 |
|
Sell |
|
GBP |
|
|
384,000 |
|
|
|
02/03/10 |
|
|
|
28,789 |
|
Sell |
|
GBP |
|
|
2,583,500 |
|
|
|
05/14/10 |
|
|
|
145,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
281,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements. | 13
STATEMENT OF ASSETS AND LIABILITIES
|
|
|
|
|
|
As of December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
($) |
|
Assets: |
|
|
|
|
Unaffiliated issuers, at value (cost $792,338,651) |
|
|
509,734,699 |
|
Affiliated issuers, at value (cost $74,551,078) (Note 10) |
|
|
67,684,538 |
|
|
|
|
|
|
Total investments, at value (cost $866,889,729) |
|
|
577,419,237 |
|
Cash and foreign currency* |
|
|
9,497,085 |
|
Restricted cash (Note 2) |
|
|
1,250,615 |
|
Cash held as collateral for securities loaned (Note 8) |
|
|
753,763 |
|
Net unrealized appreciation on forward foreign currency contracts |
|
|
281,895 |
|
Receivable for: |
|
|
|
|
Investments sold |
|
|
4,566,080 |
|
Dividends and interest receivable |
|
|
7,876,544 |
|
Prepaid commitment fee (Note 7) |
|
|
1,243,645 |
|
Other assets |
|
|
84,450 |
|
|
|
|
|
|
Total assets |
|
|
602,973,314 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Notes payable (Note 7) |
|
|
112,000,000 |
|
Securities sold short, at value (proceeds $1,178,072) |
|
|
1,171,714 |
|
Net discount and unrealized depreciation on unfunded transactions (Note 9) |
|
|
5,939,043 |
|
Payable upon receipt of securities loaned (Note 8) |
|
|
753,763 |
|
Payables for: |
|
|
|
|
Investments purchased |
|
|
23,225,077 |
|
Investment advisory fee payable (Note 4) |
|
|
413,742 |
|
Administration fee (Note 4) |
|
|
62,521 |
|
Trustees fees (Note 4) |
|
|
36,570 |
|
Interest expense (Note 7) |
|
|
130,010 |
|
Accrued expenses and other liabilities |
|
|
477,029 |
|
|
|
|
|
|
Total liabilities |
|
|
144,209,469 |
|
|
|
|
|
|
Net Assets Applicable To Common Shares |
|
|
458,763,845 |
|
|
|
|
|
|
|
|
|
|
|
Composition of Net Assets: |
|
|
|
|
Par value of common shares (Note 1) |
|
|
63,699 |
|
Paid-in capital in excess of par value of common shares |
|
|
1,156,135,046 |
|
Undistributed net investment income |
|
|
7,570,774 |
|
Accumulated net realized gain/(loss) from investments, short positions, credit default swap and foreign currency transactions |
|
|
(412,073,293 |
) |
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, short positions,
forward foreign currency contracts, credit default swap, senior loan based derivatives and translation of assets
and liabilities denominated in foreign currency |
|
|
(292,932,381 |
) |
|
|
|
|
|
Net Assets Applicable to Common Shares |
|
|
458,763,845 |
|
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
|
|
|
Net assets |
|
|
458,763,845 |
|
Shares outstanding (unlimited authorization) |
|
|
63,699,429 |
|
Net asset value per share (Net assets/shares outstanding) |
|
|
7.20 |
|
|
|
|
* |
|
Foreign currency held at cost is $(135,064). |
14 | See accompanying Notes to Financial Statements.
STATEMENT OF OPERATIONS
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
($) |
|
Investment Income: |
|
|
|
|
Interest from unaffiliated issuers |
|
|
53,083,998 |
|
Interest from affiliated issuers (Note 10) |
|
|
4,755,228 |
|
Securities lending income |
|
|
23,180 |
|
|
|
|
|
|
Total investment income |
|
|
57,862,406 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
Investment advisory fees (Note 4) |
|
|
4,922,321 |
|
Administration fees (Note 4) |
|
|
984,464 |
|
Accounting service fees |
|
|
313,610 |
|
Transfer agent fee |
|
|
87,909 |
|
Trustees fees (Note 4) |
|
|
137,061 |
|
Custodian fees |
|
|
63,722 |
|
Registration fees |
|
|
74,312 |
|
Reports to shareholders |
|
|
192,872 |
|
Merger expenses (Note 13) |
|
|
672,322 |
|
Audit fees |
|
|
127,650 |
|
Legal fees |
|
|
1,578,393 |
|
Insurance expense |
|
|
119,923 |
|
Interest expense (Note 7) |
|
|
4,974,015 |
|
Commitment fee expense (Note 7) |
|
|
898,355 |
|
Other expenses |
|
|
242,023 |
|
|
|
|
|
|
Total operating expenses |
|
|
15,388,952 |
|
|
|
|
|
|
Fees and expenses waived or reimbursed by Investment Adviser (Note 4) |
|
|
(1,232,025 |
) |
|
|
|
|
|
Net operating expenses |
|
|
14,156,927 |
|
|
|
|
|
|
Dividends paid on securities sold short |
|
|
12,689 |
|
|
|
|
|
|
Net expenses |
|
|
14,169,616 |
|
|
|
|
|
|
Net investment income |
|
|
43,692,790 |
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gain/(Loss) on Investments: |
|
|
|
|
Net realized gain/(loss) on investments from unaffiliated issuers |
|
|
(159,140,098 |
) |
Net realized gain/(loss) on credit default swap (1) |
|
|
238,001 |
|
Net realized gain/(loss) on forward foreign currency contracts (2) |
|
|
4,678,395 |
|
Net realized gain/(loss) on foreign currency transactions |
|
|
(85,046 |
) |
Net change in unrealized appreciation/(depreciation) on investments * |
|
|
206,225,996 |
|
Net change in unrealized appreciation/(depreciation) on unfunded transactions (Note 9) |
|
|
2,770,296 |
|
Net change in unrealized appreciation/(depreciation) on short positions |
|
|
6,358 |
|
Net change in unrealized appreciation/(depreciation) on forward foreign currency contracts (2) |
|
|
(4,839,756 |
) |
Net change in unrealized appreciation/(depreciation) on credit default swap and senior loan based derivatives (1) |
|
|
(282,543 |
) |
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities
denominated in foreign currency |
|
|
(901,372 |
) |
|
|
|
|
|
Net realized and unrealized gain/(loss) on investments |
|
|
48,670,231 |
|
|
|
|
|
|
Net increase in net assets from operations |
|
|
92,363,021 |
|
|
|
|
|
|
|
|
|
* |
|
Change in unrealized appreciation (depreciation) does not include unrealized depreciation of
$86,923,196 in connection with the reorganization of HCD into the Fund on June 12, 2009 (See
Notes 1 and 13). |
|
(1) |
|
The primary risk exposure is credit contracts (See Notes 1 and 12). |
|
(2) |
|
The primary risk exposure is foreign exchange contracts (See Notes 1 and 12). |
See accompanying Notes to Financial Statements. | 15
STATEMENTS OF CHANGES IN NET ASSETS
Highland Credit Strategies Fund
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
($) |
|
($) |
|
|
|
|
|
From Operations |
|
|
|
|
|
|
|
|
Net investment income |
|
|
43,692,790 |
|
|
|
73,076,096 |
|
Net realized gain/(loss) on investments, short positions, credit default swap and foreign currency transactions |
|
|
(154,308,748 |
) |
|
|
(205,020,852 |
) |
Net change in unrealized appreciation/(depreciation) on investments,
unfunded transactions, short positions, forward foreign currency contracts,
credit default swap, senior loan based derivatives and translation of assets
and liabilities denominated in foreign currency (a) |
|
|
202,978,979 |
|
|
|
(319,230,361 |
) |
|
|
|
|
|
|
|
|
|
Net change in net assets from operations |
|
|
92,363,021 |
|
|
|
(451,175,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions Declared to Common Shareholders |
|
|
|
|
|
|
|
|
From net investment income |
|
|
(46,162,639 |
) |
|
|
(74,715,148 |
) |
From capital gains |
|
|
|
|
|
|
(10,782,212 |
) |
|
|
|
|
|
|
|
|
|
Total distributions declared to common shareholders |
|
|
(46,162,639 |
) |
|
|
(85,497,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Transactions from Common Shares |
|
|
|
|
|
|
|
|
Subscriptions from rights offering |
|
|
|
|
|
|
143,506,876 |
|
Subscriptions from reorganizations (Notes 1 and 13) |
|
|
51,353,210 |
|
|
|
133,321,183 |
|
Redemptions from reorganizations (Notes 1 and 13) (b) |
|
|
(252 |
) |
|
|
(23,238 |
) |
|
|
|
|
|
|
|
|
|
Net increase from share transactions from common shares |
|
|
51,352,958 |
|
|
|
276,804,821 |
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets from common shares |
|
|
97,553,340 |
|
|
|
(259,867,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets Applicable to Common Shares |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
361,210,505 |
|
|
|
621,078,161 |
|
|
|
|
|
|
|
|
|
|
End of year (including undistributed net investment income of $7,570,774 and $4,907,190, respectively) |
|
|
458,763,845 |
|
|
|
361,210,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Common Shares |
|
|
|
|
|
|
|
|
Subscriptions from rights offering |
|
|
|
|
|
|
11,535,615 |
|
Subscriptions from reorganizations |
|
|
8,173,278 |
|
|
|
9,471,694 |
|
Redemptions from reorganizations(b) |
|
|
(39 |
) |
|
|
(1,669 |
) |
|
|
|
|
|
|
|
|
|
Net increase in common shares |
|
|
8,173,239 |
|
|
|
21,005,640 |
|
|
|
|
(a) |
|
Does not include unrealized depreciation of $86,923,196 and $33,787,604, respectively, in
connection with the reorganizations of PHY and CNN into the Fund on July 18, 2008 and the
reorganization of HCD into the Fund on June 12, 2009 (the Reorganizations). (See Notes 1 and 13). |
|
(b) |
|
Fractional shares in the Reorganizations were redeemed. Only whole shares were issued. |
16 | See accompanying Notes to Financial Statements.
STATEMENT OF CASH FLOWS
|
|
|
For the Year Ended December 31, 2009)
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
($) |
|
|
Cash Flows Provided by Operating Activities |
|
|
|
|
Net investment income |
|
|
43,692,790 |
|
|
|
|
|
|
Adjustments to Reconcile Net Investment Income to Net Cash and Foreign Currency
Provided by Operating Activities |
|
|
|
|
Purchase of investment securities |
|
|
(431,611,930 |
) |
Proceeds from disposition of investment securities |
|
|
427,060,416 |
|
Purchase of securities sold short |
|
|
1,178,072 |
|
Decrease in receivable for investments sold |
|
|
27,522,539 |
|
Decrease in receivable for credit default swap (a) |
|
|
966,803 |
|
Decrease in interest and fees receivable |
|
|
11,305,689 |
|
Increase in restricted cash |
|
|
(1,250,615 |
) |
Decrease in receivable for securities lending |
|
|
4,524,475 |
|
Increase in other assets |
|
|
(1,269,119 |
) |
Net amortization/(accretion) of premium/(discount) |
|
|
(5,578,622 |
) |
Mark-to-market on realized and unrealized gain/(loss) on foreign currency |
|
|
3,691,977 |
|
Increase in payable for investments purchased |
|
|
12,164,559 |
|
Decrease in payable |
|
|
(2,190,175 |
) |
Decrease in payables to related parties |
|
|
(247,993 |
) |
Decrease in interest payable |
|
|
(507,807 |
) |
Decrease in
payable upon receipt of securities loaned |
|
|
(4,524,475 |
) |
Decrease in dividends payable on securities sold short |
|
|
(1,849 |
) |
Decrease in excise tax payable |
|
|
(353,670 |
) |
Decrease in other expenses and liabilities |
|
|
(705,569 |
) |
|
|
|
|
Net cash and foreign currency provided by operating activities |
|
|
83,865,496 |
|
|
|
|
|
|
|
|
|
|
Cash Flows Used by Financing Activities |
|
|
|
|
Decrease in notes payable |
|
|
(29,000,000 |
) |
Net purchase of short-term securities as a result of reorganizations (Notes 1 and 13) |
|
|
505,826 |
|
Payment of shares redeemed as a result of reorganizations (Notes 1 and 13) |
|
|
(252 |
) |
Distributions paid in cash |
|
|
(46,162,639 |
) |
|
|
|
|
Net cash flow used by financing activities |
|
|
(74,657,065 |
) |
|
|
|
|
Net increase in cash and foreign currency |
|
|
9,208,431 |
|
|
|
|
|
|
|
|
|
|
Cash and Foreign Currency |
|
|
|
|
Beginning of the year |
|
|
288,654 |
|
|
|
|
|
End of the year |
|
|
9,497,085 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
Cash paid during the year for interest |
|
|
5,481,425 |
|
|
|
|
|
|
|
|
(a) |
|
Includes realized gain/(loss) on credit default swap. |
See accompanying Notes to Financial Statements. | 17
FINANCIAL HIGHLIGHTS
Highland Credit Strategies Fund
Selected data for a share outstanding throughout each period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
Period Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
Common Shares Per Share Operating Performance: |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006(a) |
|
Net Asset Value, Beginning of Year |
|
$ |
6.51 |
|
|
$ |
17.99 |
|
|
$ |
20.08 |
|
|
$ |
19.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
0.74 |
|
|
|
1.35 |
|
|
|
1.71 |
|
|
|
0.71 |
|
Net realized and unrealized gain/(loss) on investments |
|
|
0.74 |
|
|
|
(9.79 |
) |
|
|
(1.85 |
) |
|
|
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations |
|
|
1.48 |
|
|
|
(8.44 |
) |
|
|
(0.14 |
) |
|
|
1.62 |
|
Less Distributions Declared to Common Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income |
|
|
(0.79 |
) |
|
|
(1.46 |
) |
|
|
(1.65 |
) |
|
|
(0.60 |
) |
From net realized gains |
|
|
|
|
|
|
(0.26 |
) |
|
|
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions declared to common shareholders |
|
|
(0.79 |
) |
|
|
(1.72 |
) |
|
|
(1.95 |
) |
|
|
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive impact of rights offering |
|
|
|
|
|
|
(1.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, End of Year |
|
$ |
7.20 |
|
|
$ |
6.51 |
|
|
$ |
17.99 |
|
|
$ |
20.08 |
|
Market Value, End of Year |
|
$ |
6.31 |
|
|
$ |
5.70 |
|
|
$ |
15.82 |
|
|
$ |
21.16 |
|
Market Value Total Return (c) |
|
|
27.69 |
% |
|
|
(57.84 |
)% |
|
|
(17.05 |
)% |
|
|
9.06 |
% (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000 s) |
|
$ |
458,764 |
|
|
$ |
361,211 |
|
|
$ |
621,078 |
|
|
$ |
692,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Information at End of Year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios based on average net assets of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating expenses (including interest and
commitment fee expense) |
|
|
3.90 |
% |
|
|
3.78 |
% |
|
|
4.03 |
% |
|
|
2.56 |
% |
Interest and commitment fee expense |
|
|
1.49 |
% |
|
|
1.63 |
% |
|
|
2.16 |
% |
|
|
1.03 |
% |
Dividend expense from short positions |
|
|
|
(d) |
|
|
0.17 |
% |
|
|
0.03 |
% |
|
|
N/A |
|
Fees and expenses waived |
|
|
(0.31 |
)% |
|
|
(0.09 |
)% |
|
|
|
|
|
|
|
|
Net expenses |
|
|
3.59 |
% |
|
|
3.86 |
% |
|
|
4.06 |
% |
|
|
2.56 |
% |
Net investment income |
|
|
11.09 |
% |
|
|
11.36 |
% |
|
|
8.64 |
% |
|
|
7.37 |
% |
Ratios based on managed net assets of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating expenses (including interest and
commitment fee expense) |
|
|
3.12 |
% |
|
|
2.69 |
% |
|
|
2.94 |
% |
|
|
2.20 |
% |
Interest and commitment fee expense |
|
|
1.19 |
% |
|
|
1.16 |
% |
|
|
1.58 |
% |
|
|
0.89 |
% |
Dividend expense from short positions |
|
|
|
(d) |
|
|
0.12 |
% |
|
|
0.02 |
% |
|
|
N/A |
|
Fees and expenses waived |
|
|
(0.25 |
)% |
|
|
(0.06 |
)% |
|
|
|
|
|
|
|
|
Net expenses |
|
|
2.87 |
|
|
|
2.75 |
% |
|
|
2.96 |
% |
|
|
2.20 |
% |
Net investment income |
|
|
8.88 |
% |
|
|
8.12 |
% |
|
|
6.31 |
% |
|
|
6.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
88 |
% |
|
|
78 |
% |
|
|
66 |
% |
|
|
46 |
% (b) |
|
|
|
(a) |
|
Highland Credit Strategies Fund commenced investment
operations on June 29, 2006. (b) Not annualized. |
|
(b) |
|
Not annualized. |
|
(c) |
|
Based on market value per share. Distributions, if any, are assumed for purposes of this
calculation to be reinvested at prices obtained under the Funds Dividend Reinvestment Plan. |
|
(d) |
|
Less than 0.005%. |
18 | See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Note 1. Organization and Operations
Highland Credit Strategies Fund (the Fund) is a
Delaware statutory trust and is registered with the
Securities and Exchange Commission (the SEC) under the
Investment Company Act of 1940, as amended (the 1940
Act), as a non-diversified, closed-end management
investment company. The Fund may issue an unlimited
number of common shares, par value $0.001 per share
(Common Shares). The Fund commenced operations on June
29, 2006.
On July 18, 2008, the Fund issued 5,805,987 shares, in
exchange for 30,874,699 shares of Prospect Street High
Income Portfolio Inc. (PHY) and 3,665,707 shares in
exchange for 9,947,104 shares of Prospect Street Income
Shares Inc. (CNN) to acquire PHY and CNN in a tax-free
exchange approved by the Board of Directors and
stockholders of each acquired fund. The net assets on
such date of the Fund, PHY, and CNN were $641,375,543,
$80,852,458, and $51,047,990, respectively.
On June 12, 2009, the Fund issued 8,173,238 shares, in
exchange for 17,716,771 shares of Highland Distressed
Opportunities, Inc. (HCD). The net assets on such date
of the Fund and HCD were $348,872,330 and $51,353,210,
respectively (See Note 13).
Investment Objective
The Fund seeks to provide both current income and
capital appreciation.
Note 2. Significant Accounting Policies
The following is a summary of significant
accounting policies consistently followed by the Fund in
the preparation of its financial statements.
Use of Estimates
The Funds financial statements have been prepared
in conformity with accounting principles generally
accepted in the United States of America (GAAP), which
require management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the
reporting period. Changes in the economic environment,
financial markets and any other
parameters used in determining these estimates could
cause actual results to differ materially.
Fund Valuation
The net asset value (NAV) of the Funds common
shares is calculated as of the last business day of each
month, in connection with each issuance of common shares
by the Fund, as of each distribution date (after giving
effect to the relevant declaration) and on such other
dates as determined by the Funds Board of Trustees (the
Board or Trustees), or its designee, in accordance
with procedures approved by the Board. The NAV is
calculated by dividing the value of the Funds net
assets attributable to common shares by the numbers of
common shares outstanding.
Valuation of Investments
In computing the Funds net assets attributable to
common shares, securities with readily available market
quotations use those quotations for valuation. When
portfolio securities are traded on the relevant day of
valuation, the valuation will be the last reported sale
price on that day. If there are no such sales on that
day, the security will be valued at the mean between the
most recently quoted bid and asked prices provided by
the principal market makers. If there is more than one
such principal market maker, the value shall be the
average of such means. Securities without a sale price
or quotations from principal market makers on the
valuation day may be priced by an independent pricing
service. Generally, the Funds loan and bond positions
are not traded on exchanges and consequently are valued
based on a mean of the bid and ask price from the
third-party pricing services or broker-dealer sources
that Highland Capital Management, L.P. (the Investment
Adviser) has determined generally has the capability to
provide appropriate pricing services and has been
approved by the Trustees.
Securities for which market quotations are not readily
available, for which the Fund has determined the price
received from a pricing service or broker-dealer is
stale or otherwise do not represent fair value
(including when events materially affect the value of
securities that occur between the time when market price
is determined and calculation of the Funds net asset
value), will be valued by the Fund at fair value, as
determined by the Board or its designee in good faith in
accordance with procedures approved by the Board, taking
into account factors reasonably determined to be
relevant, including: (i) the fundamental analytical data
relating to the investment; (ii) the nature and duration
of restrictions on disposition of the securities; and
(iii) an evaluation of the forces that influence the
market in which these securities are purchased and sold.
In these cases, the Funds NAV will reflect the affected
portfolio securities fair value as determined in the
judgment of the Board or its designee instead of being
determined by the market. Using a
fair value pricing methodology to value securities may
result in a value that is different from a securitys
most recent sale price and from the prices used by other
investment companies to calculate their NAV.
Determination of fair value is uncertain because it
involves subjective judgments and estimates not easily
substantiated by auditing procedures.
There can be no assurance that the Funds valuation of a
security will not differ from the amount that it
realizes upon the sale of such security. Short-term
investments, that is, those with a remaining maturity of
60 days or less, are valued at cost adjusted for
amortization of premiums and accretion of discounts.
Repurchase agreements are valued at cost plus accrued
interest. Foreign price quotations are converted to U.S.
dollar equivalents using the 4:00 PM London Time Spot
Rate.
Annual Report | 19
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Fair Value Measurements:
The Fund has performed an analysis of all existing
investments and derivative instruments to determine the
significance and character of all inputs to their fair
value determination. The levels of fair value inputs
used to measure the Funds investments are characterized
into a fair value hierarchy. Where inputs for an asset
or liability fall into more than one level in the fair
value hierarchy, the investment is classified in its
entirety based on the lowest level input that is
significant to that investments valuation. The three
levels of the fair value hierarchy are described below:
|
|
|
Level 1
|
|
Quoted unadjusted prices for identical
instruments in active markets to which the Fund has
access at the date of measurement; |
|
|
|
Level 2
|
|
Quoted prices for similar instruments in
active markets; quoted prices for identical or similar
instruments in markets that are not active, but are
valued based on executed trades; broker quotations that
constitute an executable price; and alternative pricing
sources supported by observable inputs are classified
within Level 2. Level 2 inputs are either directly or
indirectly observable for the asset in connection with
market data at the measurement date; and |
|
|
|
Level 3
|
|
Model derived valuations in which one or more
significant inputs or significant value drivers are
unobservable. In certain cases, investments classified
within Level 3 may include securities for which the Fund
has obtained indicative quotes from broker-dealers that
do not necessarily represent prices the broker may be
willing to trade on, as such quotes can be subject to
material management judgment. Unobservable inputs are
those inputs that reflect the Funds own assumptions
that market participants would use to price the asset or
liability based on the best available information. |
Due to the inherent uncertainty of determining the fair
value of investments that do not have a readily
available market value, the fair value of the Funds
investments may fluctuate from period to period.
Additionally, the fair value of investments may differ
significantly from the values that would have been used
had a ready market existed for such investments and may
differ materially from the values the Fund may
ultimately realize. Further, such investments may be
subject to legal and other restrictions on resale or
otherwise less liquid than publicly traded securities.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk
associated with investing in those securities. A summary of the inputs used to value the Funds
assets as of December 31, 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
Level 1 |
|
|
Significant |
|
|
Significant |
|
|
|
Total Value at |
|
|
Quoted |
|
|
Observable |
|
|
Unobservable |
|
Investment in Securities |
|
December 31, 2009 |
|
|
Price |
|
|
Input |
|
|
Input |
|
Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace |
|
$ |
44,928 |
|
|
$ |
|
|
|
$ |
44,928 |
|
|
$ |
|
|
Broadcasting |
|
|
87,791 |
|
|
|
87,791 |
|
|
|
|
|
|
|
|
|
Diversified Media |
|
|
765,188 |
|
|
|
|
|
|
|
|
|
|
|
765,188 |
|
Healthcare |
|
|
38,555,838 |
|
|
|
|
|
|
|
|
|
|
|
38,555,838 |
|
Metals/Minerals |
|
|
454,361 |
|
|
|
|
|
|
|
|
|
|
|
454,361 |
|
Retail |
|
|
803,954 |
|
|
|
803,954 |
|
|
|
|
|
|
|
|
|
Service |
|
|
1,406,750 |
|
|
|
|
|
|
|
|
|
|
|
1,406,750 |
|
Telecommunications |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Transportation Land Transportation |
|
|
937,144 |
|
|
|
|
|
|
|
|
|
|
|
937,144 |
|
Utility |
|
|
182,687 |
|
|
|
|
|
|
|
|
|
|
|
182,687 |
|
Wireless Communication |
|
|
1,913,829 |
|
|
|
1,913,829 |
|
|
|
|
|
|
|
|
|
Preferred Stocks |
|
|
12,779,190 |
|
|
|
|
|
|
|
5,000 |
|
|
|
12,774,190 |
|
Warrants |
|
|
908,426 |
|
|
|
907,726 |
|
|
|
|
|
|
|
700 |
|
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Loans |
|
|
358,150,761 |
|
|
|
|
|
|
|
202,395,514 |
|
|
|
155,755,247 |
|
Asset-Backed Securities |
|
|
33,822,437 |
|
|
|
|
|
|
|
|
|
|
|
33,822,437 |
|
Corporate Debt |
|
|
126,164,245 |
|
|
|
|
|
|
|
52,562,723 |
|
|
|
73,601,522 |
|
Claims |
|
|
441,698 |
|
|
|
|
|
|
|
|
|
|
|
441,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
577,419,237 |
|
|
$ |
3,713,310 |
|
|
$ |
255,008,165 |
|
|
$ |
318,697,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
(1,171,714 |
) |
|
$ |
|
|
|
$ |
(1,171,714 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
281,895 |
|
|
|
|
|
|
|
281,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Financial Instruments |
|
$ |
(889,819 |
) |
|
$ |
|
|
|
$ |
(889,819 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Other financial instruments are derivative instruments not reflected in the Investment
Portfolio, such as forwards and swaps, which are valued at the unrealized
appreciation/(depreciation) on the investment. |
20 | Annual Report
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
The Fund did not have any liabilities that were measured at fair value or Level 3 on a
recurring basis at December 31, 2009.
The tables below set forth a summary of changes in the Funds assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the year ended December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
amortization/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value |
|
Balance as of |
|
|
Transfers |
|
|
Acquired from |
|
|
(accretion) of |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
|
using unobservable |
|
December 31, |
|
|
in/(out) |
|
|
Reorganization |
|
|
premium/ |
|
|
Net realized |
|
|
unrealized |
|
|
purchase/ |
|
|
Balance as of |
|
inputs (Level 3) |
|
2008 |
|
|
of Level 3 |
|
|
(Note 13) |
|
|
(discount) |
|
|
gains/(losses) |
|
|
gains/(losses) |
|
|
(sales)* |
|
|
December 31, 2009 |
|
Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Media |
|
$ |
489,310 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
275,878 |
|
|
$ |
|
|
|
$ |
765,188 |
|
Healthcare |
|
|
10,157,000 |
|
|
|
|
|
|
|
14,880,000 |
|
|
|
|
|
|
|
|
|
|
|
8,123,000 |
|
|
|
5,395,838 |
|
|
|
38,555,838 |
|
Information Technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,214,460 |
) |
|
|
1,214,460 |
|
|
|
|
|
Metals/Minerals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,039 |
) |
|
|
482,400 |
|
|
|
454,361 |
|
Service |
|
|
502,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
904,339 |
|
|
|
|
|
|
|
1,406,750 |
|
Transportation
Land Transportation |
|
|
585,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
352,071 |
|
|
|
|
|
|
|
937,144 |
|
Utility |
|
|
324,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,089 |
) |
|
|
|
|
|
|
182,687 |
|
Preferred Stocks |
|
|
9,999,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,774,193 |
|
|
|
|
|
|
|
12,774,190 |
|
Warrants |
|
|
309,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308,373 |
) |
|
|
|
|
|
|
700 |
|
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Loans |
|
|
210,106,203 |
|
|
|
1,451,431 |
|
|
|
18,895,689 |
|
|
|
2,392,933 |
|
|
|
(85,264,703 |
) |
|
|
58,053,483 |
|
|
|
(49,879,789 |
) |
|
|
155,755,247 |
|
Asset-Backed Securities |
|
|
9,437,152 |
|
|
|
|
|
|
|
|
|
|
|
319,033 |
|
|
|
700,309 |
|
|
|
24,898,421 |
|
|
|
(1,532,478 |
) |
|
|
33,822,437 |
|
Corporate Debt |
|
|
118,919,586 |
|
|
|
(15,140,088 |
) |
|
|
14,718,377 |
|
|
|
185,971 |
|
|
|
(23,348,057 |
) |
|
|
15,773,071 |
|
|
|
(37,507,338 |
) |
|
|
73,601,522 |
|
Claims |
|
|
1,306,894 |
|
|
|
|
|
|
|
17,469 |
|
|
|
|
|
|
|
(4,836,655 |
) |
|
|
5,135,944 |
|
|
|
(1,181,954 |
) |
|
|
441,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
362,137,475 |
|
|
$ |
(13,688,657 |
) |
|
$ |
48,511,535 |
|
|
$ |
2,897,937 |
|
|
$ |
(112,749,106 |
) |
|
$ |
114,597,439 |
|
|
$ |
(83,008,861 |
) |
|
$ |
318,697,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes any applicable borrowings and/or pay downs made on revolving credit facilities held
in the Funds investment portfolio. |
The net unrealized losses presented in the tables
above relate to investments that are still held at
December 31, 2009, and the Fund presents these
unrealized losses on the Statement of Operations as net
change in unrealized appreciation/(depreciation) on
investments.
Investments designated as Level 3 may include assets
valued using quotes or indications furnished by brokers
which are based on models or estimates and may not be
executable prices. In light of the developing market
conditions, the Investment Adviser continues to search
for observable data points and evaluate broker quotes
and indications received for portfolio investments. As a
result, for the year ended December 31, 2009, a net
amount of $13,688,657 of the Funds portfolio
investments was transferred to/from Level 2 to Level 3.
Determination of fair values is uncertain because it
involves subjective judgments and estimates not easily
substantiated by auditing procedures.
Security Transactions
Security transactions are accounted for on the
trade date. Cost is determined and gains/(losses) are
based upon the specific identification method for both
financial statement and federal income tax purposes.
Foreign Currency
Foreign currencies, investments and other assets
and liabilities are translated into U.S. dollars at the
exchange rates using the current 4:00 PM London Time
Spot Rate. Fluctuations in the value of the foreign
currencies and other assets and liabilities resulting
from changes in exchange rates between trade and
settlement dates on security transactions and between
the accrual and payment dates on dividends, interest
income and foreign withholding taxes are recorded as
unrealized foreign currency gains/(losses). Realized
gains/(losses) and unrealized
appreciation/(depreciation) on investment securities and
income and expenses are translated on the respective
dates of such transactions. The effect of changes in
foreign currency exchange rates on investments in
securities are not segregated in the Statement of
Operations from the effects of changes in market prices
of those securities, but are included with the net
realized and unrealized gain or loss on investment
securities.
Forward Foreign Currency Contracts
In order to minimize the movement in NAV resulting
from a decline or appreciation in the value of a
particular foreign currency against the U.S. dollar or
another foreign currency or for other reasons, the Fund
is authorized to enter into forward currency exchange
contracts. These contracts involve an obligation to
purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward
currency contracts do not eliminate fluctuations in the
values of portfolio securities but rather allow the Fund
to establish a rate of exchange for a future point in
time. With forwards, there is counterparty credit risk
to the Fund because the forwards are not exchange
traded, and there is no clearinghouse to guarantee the
forwards against default.
Short Equity and Bond Sales
A short sale is a transaction in which the Fund
sells a security it does not own in anticipation that
the market price of that security will decline. When the
Fund makes a short sale, it must borrow the security
sold short from a broker-dealer and deliver it to the
buyer upon settlement of the sale.
Annual Report | 21
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any
payments received on such borrowed securities. Cash of
$1,250,615 held as collateral for short sales is
included in restricted cash on the Statement of Assets
and Liabilities.
When short sales are employed, the Fund intends to
attempt to limit exposure to a possible market decline
in the value of its portfolio securities through short
sales of securities that the Investment Adviser believes
possess volatility characteristics similar to those
being hedged. In addition, the Fund may use short sales
for non-hedging purposes to pursue its investment
objective. Subject to the requirements of the 1940 Act
and the Internal Revenue Code of 1986, as amended (the
Code), the Fund will not make a short sale if, after
giving effect to such sale, the market value of all
securities sold short by the Fund exceeds 25% of the
value of its total assets.
Credit Default Swaps
To the extent consistent with the Funds
prospectus, the Fund may enter into credit default swap
agreements. The buyer in a credit default contract is
obligated to pay the seller a periodic stream of
payments over the term of the contract provided that no
event of default on an underlying reference obligation
has occurred. If an event of default occurs, the seller
typically pays the buyer the par value (full notional
value) of the reference obligation in exchange for the
reference obligation. The Fund may be either the buyer
or seller in the transaction. If the Fund is a buyer and
no event of default occurs, the Fund loses its
investment and recovers nothing. However, if an event of
default occurs, the buyer receives full notional value
for a reference obligation that may have little or no
value. As a seller, the Fund receives income throughout
the term of the contract, which typically is between six
months and five years, provided that there is no default
event.
Credit default swaps involve greater risks than if the
Fund had invested in the reference obligation directly.
In addition to general market risks, credit default
swaps are subject to illiquidity risk, counterparty risk
and credit risks. If an event of default were to occur,
the value of the reference obligation received by the
seller, coupled with the periodic payments previously
received, may be less than the full notional value it
pays to the buyer, resulting in a loss of value to the
seller. When the Fund acts as a seller of a credit
default swap agreement it is exposed to many of the same
risks of leverage as certain other leveraged
transactions, since if an event of default occurs the
seller must pay the buyer the full notional value of the
reference obligation. As of December 31, 2009, there were no credit default swap trades
outstanding.
Income Recognition
Interest income is recorded on the accrual basis
and includes accretion of discounts and amortization of
premiums. Dividend income is recorded on the ex-dividend
date.
U.S. Federal Income Tax Status
The Fund intends to qualify each year as a
regulated investment company under Subchapter M of the
Code, as amended, and will distribute substantially all
of its taxable income and gains, if any, for its tax
year, and as such will not be subject to U.S. federal
income taxes.
Management has analyzed the Funds tax positions taken
on federal income tax returns for all open tax years
(current and prior three tax years), and has concluded
that no provision for federal income tax is required in
the Funds financial statements. The Funds federal and
state income and federal excise tax returns for tax
years for which the applicable statutes of limitations
have not expired are subject to examination by the
Internal Revenue Service and state departments of
revenue.
Distributions to Shareholders
The Fund plans to pay distributions monthly and
capital gain distributions annually to common
shareholders. To permit the Fund to maintain more stable
monthly distributions and annual distributions, the Fund
may from time to time distribute less than the entire
amount of income and gains earned in the relevant month
or year, respectively. The undistributed income and
gains would be available to supplement future
distributions. Shareholders of the Fund will
automatically have all distributions reinvested in
Common Shares of the Fund issued by the Fund or
purchased in the open market in accordance with the
Funds Dividend Reinvestment Plan (the Plan) unless an
election is made to receive cash. Each participant in
the Plan will pay a pro rata share of brokerage
commissions incurred in connection with open market
purchases, and participants requesting a sale of
securities through the plan agent of the Plan are
subject to a sales fee and a brokerage commission.
Cash and Cash Equivalents
The Fund considers liquid assets deposited with a
bank, money market funds, and certain short term debt
instruments with maturities of 3 months or less to be
cash equivalents. These investments represent amounts
held with financial institutions that are readily
accessible to pay Fund expenses or purchase investments.
Cash and cash equivalents
are valued at cost plus accrued interest, which
approximates market value. The value of cash equivalents
denominated in foreign currencies is determined by
converting to U.S. dollars on the date of the statement
of assets and liabilities. At December 31, 2009, the
Fund had $131,401 of cash and cash equivalents
denominated in foreign currencies, with a cost of
$135,064.
Statement of Cash Flows
Information on financial transactions which have
been settled through the receipt or disbursement of cash
is presented in the Statement of Cash Flows. The cash
and foreign currency amount shown in the Statement of
Cash Flows is the amount included within the Funds
Statement of Assets and
22 | Annual Report
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Liabilities and includes cash and foreign currency
on hand at its custodian bank.
Additional Accounting Standards
In June 2009, the Financial Accounting Standards
Board (FASB) issued the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted
Accounting Principles (Codification) which identifies
the sources of accounting principles and the framework
for selecting the principles used in the preparation of
financial statements that are presented in conformity
with U.S. GAAP. It established the Codification as the
single source of authoritative accounting principles
recognized by the FASB in the preparation of financial
statements in conformity with U.S. GAAP. Codification
does not create new accounting and reporting guidance,
rather it reorganizes U.S. GAAP pronouncements into
approximately 90 topics within a consistent
structure. All guidance contained in the Codification
carries equal level of authority. The Codification became
effective for financial statements issued for interim
and annual periods ending after Sept. 15, 2009. The
Codification did not have a material effect on the
Funds financial statements.
Note 3. U.S. Federal Tax Information
The timing and character of income and capital gain
distributions are determined in accordance with income
tax regulations, which may differ from GAAP. As a
result, net investment income/(loss) and net realized
gain/(loss) on investment transactions for a reporting
period may differ significantly from distributions
during such period.
Reclassifications are made to the Funds capital
accounts for permanent tax differences to reflect income
and gains available for distribution (or available
capital loss carryforwards) under income tax
regulations.
For the year ended December 31, 2009, permanent
differences resulting primarily from foreign bond
bifurcation, realized swap gain/(loss) reclass and
Section 988 gain/(loss) reclass were identified and
reclassified among the components of the Funds net
assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed |
|
|
Accumulated |
|
|
Net Investment |
|
|
Net Realized |
|
Paid-In |
Income |
|
|
Loss |
|
Capital |
$ |
5,133,433 |
|
|
|
$ |
(11,372,531 |
) |
|
$ |
6,239,098 |
|
The tax character of distributions paid during the
years ended December 31, 2009 and December 31, 2008, the
past two tax years ends, were as follows:
|
|
|
|
|
|
|
|
|
Distributions paid from: |
|
2009 |
|
|
2008 |
|
Ordinary income* |
|
$ |
46,162,639 |
|
|
$ |
84,472,625 |
|
Long-term capital gains |
|
|
|
|
|
|
1,024,735 |
|
|
|
|
* |
|
For tax purposes, short-term capital gains
distributions, if any, are considered ordinary
income distributions. |
As of December 31, 2009, the most recent tax year
end, the components of distributable earnings on a tax
basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed |
|
|
|
Undistributed |
|
|
|
|
|
Accumulated |
Ordinary |
|
|
|
Long-Term |
|
Net Unrealized |
|
Capital and |
Income |
|
|
|
Capital Gains |
|
(Depreciation)* |
|
Other Losses |
$ |
7,982,245 |
|
|
|
|
$ |
|
|
|
$ |
(300,238,865 |
) |
|
$ |
(404,896,385 |
) |
|
|
|
* |
|
Any differences between book-basis and tax-basis
net unrealized appreciation/(depreciation) are
primarily due to deferral of losses from wash
sales. |
As of December 31, 2008, the most recent year end,
for federal income tax purposes, the Fund had capital
loss carry-forwards, which will expire in the indicated
years:
|
|
|
|
|
|
|
Capital Loss |
|
|
|
|
Expiration |
Carryforwards |
|
|
|
|
Date |
$ |
3,196,740 |
* |
|
|
|
2010 |
|
11,115,101 |
* |
|
|
|
2011 |
|
3,279,930 |
* |
|
|
|
2012 |
|
8,679,337 |
* |
|
|
|
2014 |
|
6,437,279 |
* |
|
|
|
2015 |
|
90,161,614 |
* ** |
|
|
|
2016 |
|
282,026,384 |
|
|
|
|
2017 |
$ |
404,896,385 |
|
|
Total |
|
|
|
|
|
* |
|
These capital loss carryforward amounts were
acquired in the reorganizations of PHY and CNN
into the Fund on July 18, 2008. The Funds ability
to utilize the capital loss carryforwards is
limited under Internal Revenue Service
regulations. |
|
** |
|
This capital loss carryforward amount includes
$17,875,363 acquired in the reorganization of
HCD into the Fund on June 12, 2009, and is
available to offset future capital gains of the
Fund. The Funds ability to utilize the capital
loss carryforwards is limited under Internal
Revenue Service regulations. |
Unrealized appreciation and depreciation at
December 31, 2009, based on cost of investments for U.S.
federal income tax purposes was:
|
|
|
|
|
Unrealized appreciation |
|
$ |
26,848,343 |
|
Unrealized depreciation |
|
|
(323,625,319 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation |
|
$ |
(296,776,976 |
) |
|
|
|
|
|
Note
4. Investment Advisory, Administration, and Trustee Fees
Investment Advisory Fee
The Investment Adviser to the Fund receives an
annual fee, paid monthly, in an amount equal to 1.00% of
the average weekly value of the Funds Managed Assets.
The Funds Managed Assets is an amount equal to the
total assets of the Fund, including any form of
leverage, minus all accrued expenses incurred in the
normal course of operations, but not
Annual Report | 23
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
excluding any liabilities or obligations
attributable to investment leverage obtained through (i)
indebtedness of any type (including, without limitation,
borrowing through a credit facility or the issuance of
debt securities), (ii) the issuance of preferred stock
or other preference securities, (iii) the reinvestment
of collateral received for securities loaned in
accordance with the Funds investment objectives and
policies, and/or (iv) any other means.
In connection with the reorganizations of PHY and CNN
into the Fund on July 18, 2008, the Investment Adviser
agreed to waive certain advisory fees for a period of
two years until July 17, 2010. Over the period of two
years, the Investment Adviser agreed to waive advisory
fees of $1,656,448. For the year ended December 31,
2009, the Investment Adviser waived advisory fees of
$828,225.
Administration Fee
The Investment Adviser provides administrative
services to the Fund. For its services, the Investment
Adviser receives an annual fee, payable monthly, in an
amount equal to 0.20% of the average weekly value of the
Funds Managed Assets. Under a separate
sub-administration agreement, the Investment Adviser has
delegated certain administrative functions to PNC Global
Investment Servicing (U.S.) Inc. (PNC). The Investment
Adviser pays PNC directly for these sub-administration
services.
In connection with the reorganizations of PHY and CNN
into the Fund on July 18, 2008, the Investment Adviser
agreed to waive certain administration fees for a period
of two years until July 17, 2010. Over the period of two
years, the Investment Adviser agreed to waive
administration fees of $807,602. For the year ended
December 31, 2009, the Investment Adviser waived
administration fees of $403,800.
Fees Paid to Officers and Trustees
Each Trustee who is not an interested person of
the Fund as defined in the 1940 Act (the Independent
Trustees) receives an annual retainer of $150,000
payable in quarterly installments and allocated among
each portfolio in the Highland Fund Complex based on
relative net assets. The Highland Fund Complex
consists of all of the registered investment companies
advised by the Investment Adviser as of the date of this
annual report.
The Fund pays no compensation to its one interested
Trustee or any of its officers, all of whom are
employees of the Investment Adviser.
Note 5. Fund Information
For the year ended December 31, 2009, the cost of
purchases and proceeds from sales of securities,
excluding short-term obligations, were $431,611,930 and
$427,060,416, respectively. The cost of purchases
excludes securities received from the reorganization of
HCD into the Fund on June 12, 2009.
Note 6. Senior Loan Participation Commitments
The Fund may invest its assets (plus any borrowings
for investment purposes) in adjustable rate senior loans
(Senior Loans), the interest rates of which float or
vary periodically based upon a benchmark indicator of
prevailing interest rates to domestic or foreign
corporations, partnerships and other entities that
operate in a variety of industries or geographic regions
(Borrowers). If the lead lender in a typical lending
syndicate becomes insolvent, enters Federal Deposit
Insurance Corporation (FDIC) receivership or, if not
FDIC insured enters into bankruptcy, the Fund may incur
certain costs and delays in receiving payment or may
suffer a loss of principal and/or interest.
When the Fund purchases a participation of a Senior Loan
interest, the Fund typically enters into a contractual
agreement with the lender or other third party selling
the participation, not with the Borrower directly. As
such, the Fund assumes the credit risk of the Borrowers,
as well as of the selling participants or other persons
interpositioned between the Fund and the Borrowers. The
ability of Borrowers, selling participants or other
persons interpositioned between the Fund and the
Borrowers to meet their obligations may be affected by a
number of factors, including economic developments in a
specific industry.
At December 31, 2009, the Fund held no loans on
participation.
Note 7. Credit Agreement
Effective September 16, 2009, the Fund entered into
a $170,000,000 Credit Agreement (the Credit Agreement)
with The Bank of Nova Scotia. The Credit Agreement
replaced a prior credit agreement and has a maturity
date of September 15, 2010. Concurrent with the entering
into the Credit Agreement the Fund agreed to pay a
$1,700,000 upfront fee. This fee is amortized over the
remaining term of the Credit Agreement and $498,355 of
upfront fee expense is included in commitment fee expense on the Statement of
Operations.
At December 31, 2009, the Fund had outstanding
borrowings under the Credit Agreement, totaling
$112,000,000, secured by substantially all of the assets
in the Companys portfolio, including cash and cash
equivalents. As of December 31, 2009, interest is
charged at a rate equal to the Adjusted LIBO Rate plus
2.50% per annum based on the outstanding borrowings. In
addition, the Fund has agreed to pay a commitment fee on
the unutilized commitment amount of 2.00% per annum. The
average daily loan balance was $97,865,753 at a weighted
average interest rate of 1.25%, excluding any commitment
fee, for the year ended December 31, 2009. With respect
to these borrowings, interest and commitment fees of
$5,872,370 is included in the Statement of Operations.
24 | Annual Report
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
The Fund is required to maintain 400% asset coverage with respect to amounts outstanding under
the Credit Agreement. Prior to entering into the Credit Agreement, the Fund was required to
maintain 300% asset coverage under Section 18(a) of the 1940 Act. Asset coverage is calculated by
subtracting the Funds total liabilities, not including any amount representing bank loans and
senior securities, from the Funds total assets and dividing the result by the principal amount of
the borrowings outstanding. As of the dates indicated below, the Funds debt outstanding and asset
coverage was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Coverage |
|
|
Total Amount |
|
per $1,000 of |
Date |
|
Outstanding |
|
Indebtedness |
12/31/2009 |
|
$ |
112,000,000 |
|
|
$ |
5,096 |
|
12/31/2008 |
|
|
141,000,000 |
|
|
|
3,562 |
|
12/31/2007 |
|
|
248,000,000 |
|
|
|
3,504 |
|
12/31/2006 |
|
|
285,000,000 |
|
|
|
3,429 |
|
Note 8. Securities Loans
The Fund may make secured loans of its portfolio securities amounting to not more than
one-third of the value of its total assets, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of possible delays in
recovery of the securities or possible loss of rights in the collateral should the borrower fail
financially and possible investment losses in the investment of collateral. As a matter of policy,
securities loans are made to unaffiliated broker-dealers pursuant to agreements requiring that
loans be continuously secured by collateral in cash or short-term debt obligations at least equal
at all times to the bid value of the securities subject to the loan. The borrower pays to the Fund
an amount equal to any interest or dividends received on securities subject to the loan. The Fund
retains all or a portion of the interest received on investment of the cash collateral and receives
a fee from the borrower. As of December 31, 2009, the market value of securities loaned by the Fund
was $705,084. The loaned securities were secured with cash collateral of $753,763, which was
invested in the BlackRock Institutional Money Market Trust.
Note 9. Unfunded Loan Commitments
As of December 31, 2009, the Fund had unfunded loan commitments of $4,935,735 and GBP
5,000,000, which could be extended at the option of the borrower, as detailed below:
|
|
|
|
|
|
|
Unfunded |
|
|
Loan |
Borrower |
|
Commitment |
Broadstripe, LLC |
|
$ |
1,321,970 |
|
Sirva Worldwide, Inc. |
|
|
1,613,765 |
|
Sorenson Communications, Inc. |
|
|
2,000,000 |
|
Mobileserv Ltd |
|
GBP |
5,000,000 |
|
Unfunded loan commitments are marked to market on the relevant day of valuation in accordance
with the Funds valuation policies. Any applicable unrealized gain/(loss) and unrealized
appreciation/(depreciation)
on unfunded loan commitments are recorded on the Statement of Assets and Liabilities and the
Statement of Operations, respectively. As of December 31, 2009, the Fund recognized net discount
and unrealized depreciation on unfunded transactions of $5,939,043. The net change in unrealized
appreciation on unfunded transactions of $2,770,296 is recorded in the Statement of Operations.
Note 10. Affiliated Issuers
Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as affiliated if a
Fund owns five percent or more of its voting stock. The Fund held at least five percent of the
outstanding voting stock of the following companies as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value at |
|
|
Shares at |
|
|
Market Value |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
CornCorp
Broadcasting,
Inc.* (a)
(Senior Loans) |
|
$ |
39,444,941 |
|
|
|
|
|
|
$ |
5,807,308 |
|
|
$ |
29,524,538 |
|
Communication
Corp of
America (b)
(Common Stock) |
|
|
|
|
|
|
2,010,616 |
|
|
|
|
|
|
|
|
|
Genesys Ltd. (c)
(Common Stock) |
|
|
|
|
|
|
24,000,000 |
|
|
|
10,157,000 |
|
|
|
38,160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,444,941 |
|
|
|
26,010,616 |
|
|
$ |
15,964,308 |
|
|
$ |
67,684,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Company is a wholly owned subsidiary of Communications Corporation of America. |
|
(a) |
|
On June 12, 2009, $18,849,521 par value of the security was acquired through the HCD
reorganization (See Notes 1 and 13). |
|
(b) |
|
On June 12, 2009, 1,256,635 shares of the security were acquired through the HCD
reorganization (See Notes 1 and 13). |
|
(c) |
|
On June 12, 2009 12,000,000 shares of the security were acquired through the HCD
reorganization (See Notes 1 and 13). |
Note 11. Indemnification
The Fund has a variety of indemnification obligations under contracts with its service
providers and certain counterparties. The Funds maximum exposure under these arrangements is
unknown. The Board has approved the advancement of certain expenses to a service provider in
connection with pending litigation subject to appropriate documentation and safeguards.
Note 12. Disclosure of Significant Risks and Contingencies
Concentration Risk
The Fund may focus its investments in instruments of only a few companies. The concentration
of the Funds portfolio in any one obligor would subject the Fund to a greater degree
Annual Report | 25
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
of risk with respect to defaults by such obligor, and the concentration of the portfolio in
any one industry would subject the Fund to a greater degree of risk with respect to economic
downturns relating to such industry.
Non-Payment Risk
Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of
scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund,
a reduction in the value of the Senior Loan experiencing non-payment, and a potential decrease in
the net asset value of the Fund.
Credit Risk
Investments rated below investment grade are commonly referred to as high-yield, high risk or
junk debt. They are regarded as predominantly speculative with respect to the issuing companys
continuing ability to meet principal and/or interest payments. Investments in high yield Senior
Loans may result in greater net asset value fluctuation than if the Fund did not make such
investments.
Illiquidity of Investments Risk
The investments made by the Fund may be illiquid, and consequently the Fund may not be able to
sell such investments at prices that reflect the Investment Advisers assessment of their value or
the amount originally paid for such investments by the Fund. Illiquidity may result from the
absence of an established market for the investments as well as legal, contractual or other
restrictions on their resale and other factors. Furthermore, the nature of the Funds investments,
especially those in financially distressed companies, may require a long holding period prior to
profitability.
Troubled, Distressed or Bankrupt Companies Risk
The Fund invests in companies that are troubled, in distress or bankrupt. As such, they are
subject to a multitude of legal, industry, market, environment and governmental forces that make
analysis of these companies inherently difficult. Further, the Investment Adviser relies on company
management, outside experts, market participants and personal experience to analyze potential
investments for the Fund. There can be no assurance that any of these sources will prove credible,
or that the resulting analysis will produce accurate conclusions.
Leverage Risk
The Fund currently uses leverage through borrowings from a credit facility, and may also use
leverage through the issuances of preferred shares. The use of leverage, which can be described as
exposure to changes in price at a ratio greater than the amount of equity invested, either through
the issuance of preferred shares, borrowing or other forms of market exposure, magnifies both the
favorable and unfavorable effects of price movements in the investments made by the Fund. Insofar
as the Fund employs leverage in its investment operations, the Fund will be subject to substantial
risks of loss.
Foreign Securities Risk
Investments in foreign securities involve certain factors not typically associated with
investing in U.S. securities, such as risks relating to (i) currency exchange matters, including
fluctuations in the rate of exchange between the U.S. dollar (the currency in which the books of
the Fund are maintained) and the various foreign currencies in which the Funds portfolio
securities will be denominated and costs associated with conversion of investment principal and
income from one currency into another; (ii) differences between the U.S. and foreign securities
markets, including the absence of uniform accounting, auditing and financial reporting standards
and practices and disclosure requirements, and less government supervision and regulation; (iii)
political, social or economic instability; and (iv) the extension of credit, especially in the case
of sovereign debt.
Forward Currency Contracts Risk
The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing
its investment objectives. The Fund may use futures contracts to gain exposure to, or hedge against
changes in the value of foreign currencies. A forward contract represents a commitment for the
future purchase or sale of an asset at a specified price on a specified date. Upon entering into
such contracts daily fluctuations in the value of the contract are recorded for financial statement
purposes as unrealized gains or losses by the Fund. At the expiration of the contracts the Fund
realizes the gain or loss. Upon entering into such contracts, the Fund bears the risk of exchange
rates moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the
forward contracts and may realize a loss. With forwards, there is counterparty credit risk to the
Fund because the forwards are not exchange traded, and there is no clearinghouse to guarantee the
forwards against default.
Emerging Markets Risk
Investing in securities of issuers based in underdeveloped emerging markets entails all of the
risks of investing in foreign securities to a heightened degree. These heightened risks include:
(i) greater risks of expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) the smaller size of the markets for such securities and a
lower volume of trading, resulting in lack of liquidity and in price volatility; and (iii) certain
national policies which may restrict the Funds investment opportunities, including restrictions on
investing in issuers or industries deemed sensitive to relevant national interest.
Derivatives Risk
Derivative transactions in which the Fund may engage for hedging or speculative purposes to
enhance total return, including engaging in transactions such as options, futures, swaps, foreign
currency transactions (including forward foreign currency contracts, currency swaps or options on
currency and currency futures) and other derivative transactions, involve certain risks and
considerations. These risks include the imperfect correlation between the value of such instruments
and the underlying assets, the possible default of
26 | Annual Report
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
the other party to the transaction or illiquidity of the derivative instruments. Furthermore,
the ability to successfully use derivative transactions depends on the Investment Advisers ability
to predict pertinent market movements, which can not be assured. Thus, the use of derivative
transactions may result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other than current market
value, may limit the amount of appreciation the Fund can realize on an investment or may cause the
Fund to hold a security that it might otherwise sell.
Investments in Swaps Risk
Investments in swaps involve the exchange with another party of commitment to pay a stream of
payments. Use of swaps subjects the Fund to risk of default by the
counter party. If there is a
default by the counterparty to such a transaction, there may be contractual remedies pursuant to
the agreements related to the transaction although contractual remedies may not be sufficient in
the event the counterparty is insolvent. However, the swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments which are traded in
the interbank market. The Fund may enter into total return swaps, credit default swaps, currency
swaps or other swaps which may be surrogates for other instruments such as currency forwards or
options.
Counterparty Credit Risk
Counterparty credit risk is the potential loss the Fund may incur as a result of the failure
of a counterparty or an issuer to make payment according to the terms of a contract. Counterparty
credit risk is measured as the loss the Fund would record if its counterparties failed to perform
pursuant
to the terms of their obligations to the Fund. Because the Fund may enter into over-the-counter
forwards, options, swaps and other derivatives financial instruments, the Fund is exposed to the
credit risk of its counterparties. To limit the counterparty credit risk associated with such
transactions, the Fund conducts business only with financial institutions judged by the Investment
Adviser to present acceptable credit risk.
Short Equity and Bond Sales Risk
Short selling involves selling securities which may or may not be owned and borrowing the same
securities for delivery to the purchaser, with an obligation to replace the borrowed securities at
a later date. The Fund will profit from declines in the market prices of securities sold short to
the extent such decline exceeds the transaction costs and the costs of borrowing the securities.
However, since the borrowed securities must be replaced by purchases at market prices in order to
close out the short position, any appreciation in the price of the borrowed securities would result
in a loss. There can be no assurance that the securities necessary to cover a short position will
be available for purchase.
Note 13. Reorganization Merger of Highland Distressed Opportunities, Inc. into the Fund
On December 19, 2008, the Board of Trustees approved an agreement and plan of merger and
liquidation (Agreement) which provided for the transfer of all of the assets and liabilities of
HCD for shares of the Fund. Shareholders of HCD approved the merger at a meeting on May 27, 2009.
The merger was completed by a tax-free exchange of shares on June 12, 2009. For financial reporting
purposes, assets received and shares issued by the Fund were recorded at fair value; however, the
cost basis of the
investments received from HCD was carried forward to align ongoing reporting of the Funds realized
and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
The shares outstanding of HCD immediately before the merger and shares of the Fund issued to HCD
shareholders were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merged Fund |
|
Shares Exchanged |
|
Acquiring Fund |
|
Shares Issued |
|
Net Asset Value |
|
Conversion Ratio |
|
Highland Distressed |
|
|
|
|
|
Highland Credit |
|
|
|
|
|
|
|
|
|
|
|
|
Opportunities, Inc. |
|
|
17,716,771 |
|
|
Strategies Fund |
|
|
8,173,238 |
|
|
$ |
6.28 |
|
|
|
0.4613 |
|
The net assets and net unrealized appreciation/(depreciation) of HCD and the net assets of the
Fund immediately before the merger were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Appreciation/ |
|
|
|
|
Merged Fund |
|
Net Assets |
|
(Depreciation) |
|
Acquiring Fund |
|
Net Assets |
|
Highland Distressed |
|
|
|
|
|
|
|
|
|
Highland Credit |
|
|
|
|
Opportunities, Inc |
|
$ |
51,353,210 |
|
|
$ |
(86,923,196 |
) |
|
Strategies Fund |
|
$ |
348,872,330 |
|
|
Annual Report | 27
NOTES TO FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Assuming the acquisition had been completed on January 1, 2009, the Funds results of
operations for the year ended December 31, 2009 would have been as follows:
|
|
|
|
|
Net investment income/(loss) |
|
$ |
44,575,801 |
|
Net realized and unrealized gain/(loss) on investments |
|
$ |
40,774,176 |
|
Net increase in assets from operations |
|
$ |
85,349,977 |
|
Because the combined investment portfolios have been managed as a single portfolio since the
acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of
HCD that have been included in the Funds Statement of Operations since June 12, 2009.
Note 14. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through February 19,
2010, the date the financial statements were issued, and has determined that there were no
subsequent events requiring disclosure.
28 | Annual Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Highland Credit Strategies Fund:
In our opinion, the accompanying statement of assets and liabilities, including the investment
portfolio, and the related statements of operations and of changes in net assets and of cash flows
and the financial highlights present fairly, in all material respects, the financial position of
Highland Credit Strategies Fund (the Fund) at December 31, 2009, and the results of its
operations and its cash flows for the year then ended, the changes in its net assets and the
financial highlights for the periods indicated in conformity with accounting principles generally
accepted in the United States of America. These financial statements and financial highlights
(hereafter referred to as financial statements) are the responsibility of the Funds management;
our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of investments at December
31, 2009 by correspondence with the custodian and the banks with whom the Fund owns participations
in loans, provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP
Dallas, Texas
February 19, 2010
Semi-Annual Report | 29
ADDITIONAL INFORMATION (unaudited)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Additional Portfolio Information
The Investment Adviser and its affiliates manage other accounts, including registered and
private funds and individual accounts. Although investment decisions for the Fund are made
independently from those of such other accounts, the Investment Adviser may, consistent with
applicable law, make investment recommendations to other clients or accounts that may be the same
or different from those made to the Fund, including investments in different levels of the capital
structure of a company, such as equity versus senior loans, or that take contrary provisions in
multiple levels of the capital structure. The Investment Adviser has adopted policies and
procedures that address the allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential conflicts of interest that are
designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may
create situations where a client could be disadvantaged because of the investment activities
conducted by the Investment Adviser for other client accounts. When the Fund and one or more of
such other accounts is prepared to invest in, or desires to dispose of, the same security,
available investments or opportunities for each will be allocated in a manner believed by the
Investment Adviser to be equitable to the fund and such other accounts. The Investment Adviser also
may aggregate orders to purchase and sell securities for the Fund and such other accounts. Although
the Investment Adviser believes that, over time, the potential benefits of participating in volume
transactions and negotiating lower transaction costs should benefit all accounts including the
Fund, in some cases these activities may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
Tax Information
The Fund hereby designates as qualified interest income distributions 92.18% of ordinary
income distributions, for the fiscal year ended December 31, 2009.
Dividend Reinvestment Plan
Unless the registered owner of Common Shares elects to receive cash by contacting PNC (the
Plan Agent), agent for shareholders in administering the Funds Dividend Reinvestment Plan (the
Plan), all dividends declared for your Common Shares of the Fund will be automatically reinvested
by PNC in additional Common Shares of the Fund. If a registered owner of Common Shares elects not
to participate in the Plan, you will receive all dividends in cash paid by check mailed directly to
you (or, if the shares are held in street or other nominee name, then to such nominee) by PNC, as
dividend disbursing agent. You may elect not to participate in the Plan and to receive all
dividends in cash by sending written instructions or by contacting PNC, as dividend disbursing
agent, at the address set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by contacting the Plan Agent before the dividend
record date; otherwise such termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may automatically elect to
receive cash on your behalf and may reinvest that cash in additional Common Shares of the Fund for
you.
The Plan Agent will open an account for each shareholder under the Plan in the same name in which
such shareholders Common Shares are registered. Whenever the Fund declares a dividend or other
distribution (together, a dividend) payable in cash, non-participants in the Plan will receive
cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares
will be acquired by the Plan Agent for the participants accounts, depending upon the circumstances
described below, either (i) through receipt of additional unissued but authorized Common Shares
from the Fund (newly issued Common Shares) or (ii) by purchase of outstanding Common Shares on
the open market (open-market purchases) on the New York Stock Exchange or elsewhere.
If, on the payment date for any dividend, the market price per Common Share plus estimated
brokerage commissions is greater than the net asset value per Common Share (such condition being
referred to herein as market premium), the Plan Agent will invest the dividend amount in newly
issued Common Shares, including fractions, on behalf of the participants. The number of newly
issued Common Shares to be credited to each participants account will be determined by dividing
the dollar amount of the dividend by the net asset value per Common Share on the payment date;
provided that, if the net asset value per Common Share is less than 95% of the market price per
Common Share on the payment date, the dollar amount of the dividend will be divided by 95% of the
market price per Common Share on the payment date.
If, on the payment date for any dividend, the net asset value per Common Share is greater than the
market value per common share plus estimated brokerage commissions (such condition being referred
to herein as market discount), the Plan Agent will invest the dividend amount in Common Shares
acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the payment date for any dividend, the Plan Agent will have
until the last business day before the next date on which the Common Shares trade on an
ex-dividend basis or 120 days after the payment date for such dividend, whichever is sooner (the
last purchase date), to invest the dividend amount in Common Shares acquired in open-market
purchases. It is contemplated that the Fund will pay monthly dividends. Therefore, the period
during which open-market purchases can be made will exist only from the payment date of each
dividend through the date before the ex-dividend date of the third month of the quarter. If,
before the Plan Agent has completed its open-market purchases, the market price of a Common Share
exceeds the net asset value per Common Share, the average per Common Share purchase price paid by
the Plan Agent may exceed the
30 | Annual Report
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
net asset value of the Common Shares, resulting in the acquisition of fewer common shares than
if the dividend had been paid in newly issued Common Shares on the dividend payment date. Because
of the foregoing difficulty with respect to open market purchases, if the Plan Agent is unable to
invest the full dividend amount in open market purchases during the purchase period or if the
market discount shifts to a market premium during the purchase period, the Plan Agent may cease
making open-market purchases and may invest the uninvested portion of the dividend amount in newly
issued Common Shares at the net asset value per Common Share at the close of business on the last
purchase date; provided that, if the net asset value per Common Share is less than 95% of the
market price per Common Share on the payment date, the dollar amount of the dividend will be
divided by 95% of the market price per Common Share on the payment date.
The Plan Agent maintains all shareholders accounts in the Plan and furnishes written confirmation
of all transactions in the accounts, including information needed by shareholders for tax records.
Common Shares in the account of each Plan participant will be held by the Plan Agent on behalf of
the Plan participant, and each shareholder proxy will include those shares purchased or received
pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants
and vote proxies for shares held under the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees which hold shares for others who are
the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common
Shares certified from time to time by the record shareholders name and held for the account of
beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares issued directly by the Fund.
However, each participant will pay a pro rata share of brokerage commissions incurred in connection
with open-market purchases. The automatic reinvestment of dividends will not relieve participants
of any federal, state or local income tax that may be payable (or required to be withheld) on such
dividends. Accordingly, any taxable dividend received by a participant that is reinvested in
additional Common Shares will be subject to federal (and possibly state and local) income tax even
though such participant will not receive a corresponding amount of cash with which to pay such
taxes. Participants who request a sale of shares through the Plan Agent are subject to a $2.50
sales fee and pay a brokerage commission of $0.05 per share sold.
The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to
participants in the Plan; however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at PNC, 301 Bellevue
Parkway, Wilmington, Delaware 19809; telephone (877) 665-1287.
Approval of Investment Advisory Agreement
The Fund has retained the Investment Adviser to manage its assets pursuant to an Investment
Advisory Agreement with the Investment Adviser (the Advisory Agreement), which has been approved
by the Funds Board of Trustees, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Fund (the Independent Trustees).
Following an initial term of two years, the Advisory Agreement continues in effect from
year-to-year provided such continuance is specifically approved at least annually by the vote of
the holders of at least a majority of the outstanding shares of the Fund, or by the Board of
Trustees, and, in either event, by a
majority of the Independent Trustees of the Fund casting votes in person at a meeting called for
such purpose.
At a meeting held on December 17-18, 2009, the Board, as requested through Fund counsel and the
Independent Trustees independent legal counsel, received from the Investment Adviser written and
oral information, including: (1) information confirming the financial condition of the Investment
Adviser; (2) information on the advisory and compliance personnel of the Investment Adviser,
including compensation arrangements; (3) information on the internal compliance procedures of the
Investment Adviser; (4) information regarding brokerage and portfolio transactions; (5) information
on any legal proceedings or regulatory audits or investigations affecting the Investment Adviser;
and (6) comparative information showing (i) the fees payable under the Advisory Agreement versus
the investment advisory fees of (a) certain registered investment companies that follow investment
strategies similar to those of the Fund and (b) certain private pooled investment vehicles managed
by the Investment Adviser, (ii) the Funds expense ratio versus (a) other registered investment
companies that follow investment strategies similar to those of the Fund and (b) certain
unaffiliated private pooled investment vehicles, (iii) the Funds performance versus (a) other
registered investment companies that follow investment strategies similar to those of the Fund, (b)
a private pooled investment vehicle managed by Highland and (c) a benchmark index and (iv) the
Funds profitability versus certain private pooled investment vehicles managed by the Investment
Adviser. The Trustees reviewed and considered various factors discussed in the legal memorandum
from the Independent Trustees independent legal counsel, the detailed information provided by the
Investment Adviser and other relevant information and factors.
The Trustees conclusion as to the continuation of the Advisory Agreement was based on a
comprehensive consideration of all information provided to the Trustees and not the result of any
single factor. Some of the factors that figured particularly in the Trustees deliberations are
described below, although individual Trustees may have evaluated the information presented
differently from one another, giving
Annual Report | 31
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
different weights to various factors. The fee arrangements for the Fund are the result of
review and discussion between the independent Trustees and the Investment Adviser since the Funds
inception. Certain aspects of such arrangements may receive greater scrutiny in some years than in
others, and the Trustees conclusions may be based, in part, on their consideration of these same
arrangements during the course of the year and in prior years.
The Nature, Extent, and Quality of the Services Provided by the Investment Adviser. The Trustees
considered the portfolio management services provided by the Investment Adviser and the activities
related to portfolio management, including use of technology, research capabilities and investment
management staff. They discussed the relevant experience and qualifications of the personnel
providing advisory services, including the background and experience of the members of the Funds
portfolio management team. The Trustees reviewed the management structure, assets under management
and investment philosophies and processes of the Investment Adviser. They also reviewed and
discussed the Investment Advisers compliance policies and procedures. The Trustees concluded that
the Investment Adviser has the quality and depth of personnel and investment methods essential to
performing its duties under the Advisory Agreement and that the nature and quality of such advisory
services are satisfactory.
The Investment Advisers Historical Performance in Managing the Fund. The Trustees reviewed the
Investment Advisers historical performance in managing the Fund over various time periods and
reflected on previous discussions regarding matters bearing on the Investment Advisers performance
at their meetings throughout the year. The Trustees discussed relative performance and contrasted
the Funds performance versus that of the Funds peers, as represented by certain other registered
investment companies that follow investment strategies similar to the Fund, Highland Credit
Opportunities Fund (Credit Opportunities Fund), a private pooled investment vehicle managed by
the Investment Adviser, and the Credit Suisse Leveraged Loan Index. After reviewing these and
related factors, the Trustees concluded that they were satisfied with the Investment Advisers
responses and efforts relating to performance.
The Costs of the Services to be Provided by the Investment Adviser and the Profits Realized by the
Investment Adviser and its Affiliates from the Relationship with the Fund. The Trustees also gave
substantial consideration to the fees payable under the Advisory Agreement, including: (1) the
annual fee as a portion of the Funds Managed Assets paid to the Investment Adviser under the
Advisory Agreement and the administration agreement between the Fund and the Investment Adviser;
(2) the expenses the Investment Adviser incurs in providing advisory services; (3) the
profitability of the Fund as compared to the profitability of Credit Opportunities Fund; and (4) a
comparison of the fees payable
to the Investment Adviser under the Advisory Agreement to fees payable to (i) other investment
advisers serving other registered investment companies that follow investment strategies similar to
those of the Fund and (ii) the Investment Adviser by Credit Opportunities Fund. After reviewing
these and related factors, the Trustees determined that the fees payable to the Investment Adviser
under the Advisory Agreement represent reasonable compensation in light of the services being
provided by the Investment Adviser to the Fund.
The Extent to which Economies of Scale would be Realized as the Fund Grows and Whether Fee Levels
Reflect these Economies of Scale for the Benefit of Shareholders. The Trustees considered the asset
level of the Fund, the information provided by the Investment Adviser relating to its costs and
information comparing the fee rate charged by the Investment Adviser with fee rates charged by
other unaffiliated investment advisers to their clients. The Trustees also considered that, due to
its nature as a closed-end fund, the Funds asset level is not expected to increase significantly
as a result of new capital contributions. As a result, the Trustees did not view the potential for
realization of economies of scale as the Funds assets grow to be a material factor in their
deliberations. The Trustees noted that they would consider economies
of scale in the future in the event the Fund experiences significant asset growth through a merger,
rights offering, material increase in the market value of the Funds portfolio securities or
otherwise. The Trustees considered whether breakpoints in the fee under the Advisory Agreement
would be appropriate in light of the Funds assets and current fee structure, including any
waivers, and determined not to recommend any breakpoints for the Fund at this time.
Following a further discussion of the factors deemed material, including those described above, and
the merits of the Advisory Agreement and its various provisions, the Board of Trustees, including
all of the Independent Trustees, determined that the Advisory Agreement, including the advisory fee
paid to the Investment Adviser under the Advisory Agreement, is fair and reasonable to the Fund and
approved the continuation, for a period of one year commencing December 31, 2009, of the Advisory
Agreement.
32 | Annual Report
ADDITIONAL INFORMATION (unaudited)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Trustees and Officers
The Board is responsible for the overall management of the Fund, including supervision of the
duties performed by the Investment Adviser. The names and ages of the Trustees and officers of the Fund, the year each was
first elected or appointed to office, their principal business occupations during the last five
years, the number of funds overseen by each Trustee and other directorships they hold are shown
below. The business address for each Trustee and officer of the Fund is c/o Highland Capital
Management, L.P., Two Galleria Tower, 13455 Noel Road, Suite 800, Dallas, TX 75240.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term of |
|
Principal |
|
Number of Portfolios |
|
|
|
|
|
|
Office and |
|
Occupation(s) |
|
in Highland Funds |
|
Other |
|
|
Positions |
|
Length of |
|
During Past |
|
Complex Overseen |
|
Directorships/ |
Name and Age |
|
with Funds |
|
Time Served |
|
Five Years |
|
by Trustee1 |
|
Trusteeships Held |
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy K. Hui
(Age 61)
|
|
Trustee
|
|
3 years;
Trustee since
2006
(inception)
|
|
Vice President since February
2008, Dean of Educational
Resources from July 2006 to
January 2008, Assistant Provost
for Graduate Education from
July 2004 to June 2006, and
Assistant Provost for
Educational Resources,
July 2001 to June 2004 at
Philadelphia Biblical University.
|
|
|
6 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott F. Kavanaugh
(Age 48)
|
|
Trustee
|
|
3 years;
Trustee since
2006
(inception)
|
|
Vice-Chairman, President and
Chief Operating Officer at Keller
Financial Group since
September 2007; Chairman and
Chief Executive Officer at First
Foundation Bank since
September 2007; Vice
Chairman, President and Chief
Operating Officer of First
Foundation, Inc. (holding
company) since September 2007;
Private investor since February
2004; Sales Representative at
Round Hill Securities from March
2003 to January 2004; Executive
at Provident Funding Mortgage
Corporation from February 2003
to July 2003; Executive Vice
President, Director and
Treasurer at Commercial Capital
Bank from January 2000 to
February 2003; Managing
Principal and Chief Operating
Officer at Financial Institutional
Partners Mortgage Company
and Managing Principal and
President of Financial
Institutional Partners, LLC (an
investment banking firm) from
April 1998 to February 2003.
|
|
|
6 |
|
|
None |
Annual Report | 33
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Trustees and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year First |
|
Principal |
|
Number of Portfolios |
|
|
|
|
|
|
Elected or |
|
Occupation(s) |
|
in Highland Funds |
|
Other |
Name, Address, |
|
Position |
|
Appointed |
|
During Past |
|
Complex Overseen |
|
Directorships |
and Age |
|
with Fund |
|
to Office |
|
Five Years |
|
by Trustee1 |
|
Held |
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James F. Leary
(Age 79)
|
|
Trustee
|
|
3 years;
Trustee since
2006
(inception)
|
|
Managing Director, Benefit
Capital Southwest, Inc. (a financial
consulting firm) since
January 1999.
|
|
|
6 |
|
|
Board Member of
Capstone Group
Of Funds
(7 portfolios) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bryan A. Ward
(Age 54)
|
|
Trustee
|
|
3 years;
Trustee since
2006
(inception)
|
|
Senior Manager, Accenture, LLP
(a consulting firm) since January
2002.
|
|
|
6 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERESTED TRUSTEE2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Joseph Dougherty2
(Age 39)
|
|
Trustee and
Chairman of
the Board
|
|
3 years;
Trustee and
Chairman of
the Board since
2006
(inception)
|
|
Team Leader of the Investment
Adviser since 2000, Trustee of
the funds in the Highland Fund
Complex since 2004 and
President and Chief Executive
Officer of the funds in the
Highland Fund Complex since
December 2008; Director of
NexBank Securities, Inc. since
June 2009; Senior Vice
President of Highland
Distressed Opportunities, Inc.
from September 2006 to June
2009; Senior Vice President of
the funds in the Highland Fund
Complex from 2004 to
December 2008.
|
|
|
6 |
|
|
None |
|
|
|
1 |
|
The Highland Fund Complex consists of all of the registered investment companies advised by the
Investment Adviser as of the date of this report. |
|
2 |
|
Mr. Dougherty is deemed to be an interested person of the Fund under the 1940 Act because of
his position with the Investment Adviser. |
34 | Annual Report
ADDITIONAL INFORMATION (unaudited) (continued)
|
|
|
|
|
|
December 31, 2009
|
|
Highland Credit Strategies Fund |
Trustees and Officers
|
|
|
|
|
|
|
|
|
|
|
Year First |
|
|
|
|
|
|
Elected or |
|
|
Name, Address, |
|
Position |
|
Appointed |
|
|
and Age |
|
with Fund |
|
to Office |
|
Principal Occupation(s) During Past Five Years |
OFFICERS
|
|
|
|
|
|
|
|
R. Joseph Dougherty1
(Age 39)
|
|
Chairman of
the Board,
President
and Chief
Executive
Officer
|
|
Indefinite Term;
President and
Chief Executive
Officer since
December 2008
|
|
Team Leader of the Investment Adviser since 2000, Trustee of the funds in
the Highland Fund Complex since 2004 and President and Chief Executive
Officer of the funds in the Highland Fund Complex since December 2008;
Director of NexBank Securities, Inc. since June 2009; Senior Vice President
of Highland Distressed Opportunities, Inc. from September 2006 to June
2009; Senior Vice President of the funds in the Highland Fund Complex
from 2004 to December 2008. |
|
|
|
|
|
|
|
M. Jason Blackburn
(Age 33)
|
|
Treasurer
(Principal
Accounting
Officer) and
Secretary
|
|
Indefinite
Term;
Treasurer and
Secretary
since 2006
(inception)
|
|
Assistant Controller of the Investment Adviser since November 2001 and
Treasurer and Secretary of the funds in the Highland Fund Complex. |
|
|
|
|
|
|
|
Michael Colvin
(Age 40)
|
|
Chief
Compliance
Officer
|
|
Indefinite
Term; Chief
Compliance
Officer since
July 2007
|
|
General Counsel and Chief Compliance Officer of the Investment Adviser
since June 2007 and Chief Compliance Officer of the funds in the
Highland Fund Complex since July 2007; Shareholder in the Corporate
and Securities Group at Greenberg Traurig, LLP, from January 2007 to
June 2007; Partner from January 2003 to January 2007 in the Private
Equity Practice Group at Weil, Gotshal & Manges, LLP. |
|
|
|
1 |
|
Mr. Dougherty is deemed to be an interested person of the Fund under the 1940 Act because of
his position with the Investment Adviser. |
Annual Report | 35
IMPORTANT INFORMATION ABOUT THIS REPORT
|
|
|
Investment Adviser
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, TX 75240
Transfer Agent
PNC Global Investment Servicing (U.S.) Inc.
101 Sabin Street
Pawtucket, RI 02860 |
|
This report has been prepared for shareholders of Highland Credit Strategies
Fund (the Fund). The Fund mails one shareholder report to each shareholder
address. If you would like more than one report, please call shareholder services
at 1-877-665-1287 and additional reports will be sent to you.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to its portfolio securities, and the Funds proxy
voting record for the most recent 12-month period ended June 30, are available
(i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the
Securities and Exchange Commissions (SEC) website at http://www.sec.gov. |
Custodian
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
2001 Ross Avenue, Suite 1800
Dallas, TX 75201
Fund Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02110
|
|
The Fund files its complete schedule of portfolio holdings with the
SEC for the first and third quarters of each fiscal year on Form N-Q. The
Funds Forms N-Q are available on the SECs website at http://www.sec.gov
and also may be reviewed and copied at the SECs Public Reference Room in
Washington, DC. Information on the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
On June 22, 2009, the Fund submitted a CEO annual certification to the
New York Stock Exchange (NYSE) on which the Funds principal executive
officer certified that he was not aware, as of the date, of any violation by the
Fund of the NYSEs Corporate Governance listing standards. In addition, as
required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC
rules, the Funds principal executive officer and principal financial officer made
quarterly certifications, included in filings with the SEC on Forms N-CSR and
N-Q relating to, among other things, the Funds disclosure controls and
procedures and internal controls over financial reporting, as applicable. |
36 | Annual Report
Item 2. Code of Ethics.
|
(a) |
|
The registrant, as of the end of the period covered by this report, has adopted a code
of ethics that applies to the registrants principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the registrant or a
third party. |
|
|
(b) |
|
Not applicable. |
|
|
(c) |
|
There have been no amendments, during the period covered by this report, to a provision
of the code of ethics that applies to the registrants principal executive officer,
principal financial officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code of ethics
description. |
|
|
(d) |
|
The registrant has not granted any waivers, including an implicit waiver, from a
provision of the code of ethics that applies to the registrants principal executive
officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the items set forth in
paragraph (b) of this items instructions. |
|
|
(e) |
|
Not applicable. |
|
|
(f) |
|
The registrants code of ethics is incorporated by reference to Exhibit (a)(1) to
the registrants Form N CSR filed with the Securities and Exchange Commission on March 9,
2007 (Accession No. 0000935069-07-000565) |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the registrants board of trustees has
determined that James Leary is qualified to serve as an audit committee financial expert serving on
its audit committee and that he is independent, as defined by Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
The information required by this item will be contained in the Registrants definitive Proxy
Statement for its 2010 Annual Stockholder Meeting, to be filed with the Securities and Exchange
Commission within 120 days after December 31, 2009, and is incorporated by reference herein.
Item 5. Audit Committee of Listed registrants.
The Registrant has a separately-designated standing audit committee established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. It is composed of the
following Directors, each of who is not an interested person as defined in the 1940 Act:
Timothy K. Hui
Scott F. Kavanaugh
James F. Leary
Bryan A. Ward
Item 6. Investments.
(a) |
|
Schedule of Investments in securities of unaffiliated issuers as of the close of the
reporting period is included as part of the report to shareholders filed under Item 1 of this
form. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
The Proxy Voting Policies are attached herewith
APPENDIX E
HIGHLAND CAPITAL MANAGEMENT, L.P.
PROXY VOTING POLICY
1. Application; General Principles
1.1 This proxy voting policy (the Policy) applies to securities held in Client accounts
(including registered investment companies and other pooled investment vehicles) as to which the
above-captioned investment adviser (the Company) has voting authority, directly or indirectly.
Indirect voting authority exists where the Companys voting authority is implied by a general
delegation of investment authority without reservation of proxy voting authority.
1.2 The Company shall vote proxies in respect of securities owned by or on behalf of a Client
in the Clients best economic interests and without regard to the interests of the Company or any
other Client of the Company.
2. Voting; Procedures
2.1 Monitoring. A member of the settlement group (the settlement designee) of the
Company shall have responsibility for monitoring portfolios managed by the Company for securities
subject to a proxy vote. Upon the receipt of a proxy notice related to a security held in a
portfolio managed by the Company, the settlement designee shall forward all relevant information to
the portfolio manager(s) with responsibility for the security. The portfolio manager(s) may
consult a member of the settlement group as necessary.
2.2 Voting. Upon receipt of notice from the settlement designee, the portfolio
manager(s) of the fund(s) in which the security subject to a proxy vote shall evaluate the subject
matter of the proxy and cause the proxy to be voted on behalf of the Client in accordance with the
Guidelines set forth below.
2.3 Guideline. In determining how to vote a particular proxy, the portfolio manager(s)
shall consider, among other things, the interests of each Client account as it relates to the
subject matter of the proxy, any potential conflict of interest the Company may have in voting the
proxy on behalf of the Client and the procedures set forth in this Policy. This Policy is designed
to be implemented in a manner reasonably expected to ensure that voting rights are exercised in
the best interests of the Companys clients. Each proxy is voted on a case-by-case basis taking
into consideration any relevant contractual obligations as well as other relevant facts and
circumstances. In general, the Company reviews and considers corporate governance issues related
to proxy matters and generally supports proposals that foster good corporate governance practices.
Portfolio manager(s) may vote proxies as recommended by the security issuers management on routine
matters related to the operation of the issuer and on matters not expected to have a significant
impact on the issuer and/or its shareholders, because the Company believes that recommendations by
the issuer are generally in shareholders best interests, and therefore in the best economic
interest of the Companys clients.
2.4 Conflicts of Interest. If the portfolio manager(s) determine that the Company may
have a potential material conflict of interest (as defined in Section 3 of this Policy) in voting a
particular proxy, the portfolio manager(s) shall contact the Companys compliance department prior
to causing the proxy to be voted.
2.4.1. For a security held by a an investment company, the Company shall disclose the
conflict and its reasoning for voting as it did to the Retail Funds Board of Trustees at
the next regularly scheduled quarterly meeting. In voting proxies for securities held by an
investment company, the Company may consider only the interests of the Fund. It is the
responsibility of the compliance department to document the basis for the decision and
furnish the documentation to the Board of Trustees. The Company may resolve the conflict of
interest by following the proxy voting recommendation of a disinterested third party (such
as ISS, Glass Lewis, or another institutional proxy research firm).
2.5 Non-Votes. The Company may determine not to vote proxies in respect of securities
of any issuer if it determines it would be in its Clients overall best interests not to vote.
Such determination may apply in respect of all Client holdings of the securities or only certain
specified Clients, as the Company deems appropriate under the circumstances. As examples, the
portfolio manager(s) may determine: (a) not to recall securities on loan if, in its judgment, the
matters being voted upon are not material events affecting the securities and the negative
consequences to Clients of disrupting the securities lending program would outweigh the benefits of
voting in the particular instance or (b) not to vote certain foreign securities positions if, in
its judgment, the expense and administrative inconvenience outweighs the benefits to Clients of
voting the securities.
2.6 Recordkeeping. Following the submission of a proxy vote, the applicable portfolio
manager(s) shall submit a report of the vote to a settlement designee of the Company. Records of
proxy votes by the Company shall be maintained in accordance with Section 4 of this Policy.
3. Conflicts of Interest
3.1 Voting the securities of an issuer where the following relationships or circumstances
exist are deemed to give rise to a material conflict of interest for purposes of this Policy:
3.1.1 The issuer is a Client of the Company, or of an affiliate, accounting for more
than 5% of the Companys or affiliates annual revenues.
3.1.2 The issuer is an entity that reasonably could be expected to pay the Company or
its affiliates more than $1 million through the end of the Companys next two full fiscal
years.
3.1.3 The issuer is an entity in which a Covered Person (as defined in the Companys
Policies and Procedures Designed to Detect and Prevent Insider Trading and to Comply with
Rule 17j-1 of the Investment Company Act of 1940, as amended (the Code of Ethics)) has a
beneficial interest contrary to the position held by the Company on behalf of Clients.
3.1.4 The issuer is an entity in which an officer or partner of the Company or a
relative1 of any such person is or was an officer, director or employee, or such
person or relative otherwise has received more than $150,000 in fees, compensation and other
payment from the issuer during the Companys last three fiscal years; provided,
however, that the Compliance Department may deem such a relationship not to be a
material conflict of interest if the Company representative serves as an officer or director
of the issuer at the direction of the Company for purposes of seeking control over the
issuer.
3.1.5 The matter under consideration could reasonably be expected to result in a
material financial benefit to the Company or its affiliates through the end of the Companys
next two full fiscal years (for example, a vote to increase an investment advisory fee for a
Fund advised by the Company or an affiliate).
3.1.6 Another Client or prospective Client of the Company, directly or indirectly,
conditions future engagement of the Company on voting proxies in respect of any Clients
securities on a particular matter in a particular way.
3.1.7 The Company holds various classes and types of equity and debt securities of the
same issuer contemporaneously in different Client portfolios.
3.1.8 Any other circumstance where the Companys duty to serve its Clients interests,
typically referred to as its duty of loyalty, could be compromised.
3.2 Notwithstanding the foregoing, a conflict of interest described in Section 3.1 shall not
be considered material for the purposes of this Policy in respect of a specific vote or
circumstance if:
3.2.1 The securities in respect of which the Company has the power to vote account for
less than 1% of the issuers outstanding voting securities, but only if: (i) such
securities do not represent one of the 10 largest holdings of such issuers outstanding
voting securities and (ii) such securities do not represent more than 2% of the Clients
holdings with the Company.
|
|
|
1 |
|
For the purposes of this Policy, relative
includes the following family members: spouse, minor children or stepchildren
or children or stepchildren sharing the persons home. |
3.2.2 The matter to be voted on relates to a restructuring of the terms of existing
securities or the issuance of new securities or a similar matter arising out of the holding
of securities, other than common equity, in the context of a bankruptcy or threatened
bankruptcy of the issuer.
4. Recordkeeping, Retention and Compliance Oversight
4.1 The Company shall retain records relating to the voting of proxies, including:
4.1.1 Copies of this Policy and any amendments thereto.
4.1.2 A copy of each proxy statement that the Company receives regarding Client
securities.
4.1.3 Records of each vote cast by the Company on behalf of Clients.
4.1.4 A copy of any documents created by the Company that were material to making a
decision how to vote or that memorializes the basis for that decision.
4.1.5 A copy of each written request for information on how the Company voted proxies
on behalf of the Client, and a copy of any written response by the Company to any (oral or
written) request for information on how the Company voted.
4.2 These records shall be maintained and preserved in an easily accessible place for a period
of not less than five years from the end of the Companys fiscal year during which the last entry
was made in the records, the first two years in an appropriate office of the Company.
4.3 The Company may rely on proxy statements filed on the SECs EDGAR system or on proxy
statements and records of votes cast by the Company maintained by a third party, such as a proxy
voting service (provided the Company had obtained an undertaking from the third party to provide a
copy of the proxy statement or record promptly on request).
4.4 Records relating to the voting of proxies for securities held by investment company
clients will be reported periodically, as requested, to the investment companys Board of Trustees
and, to the SEC on an annual basis pursuant to Form N-PX.
4.5 Compliance oversees the implementation of this procedure, including oversight over voting
and the retention of proxy ballots voted. The CCO may review proxy voting pursuant to the firms
compliance program.
Adopted by the Companys Compliance Committee: March 24, 2009, amended June 17, 2009.
Approved by the Highland Funds Board of Trustees for all Funds (except Highland Long/Short Equity
Fund): June 5, 2009.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
|
|
|
(a)(1) |
|
Identification of Portfolio Manager(s) or Management Team Members and Description of Role of
Portfolio Manager(s) or Management Team Members |
The Funds portfolio manager, who is primarily responsible for the day-to-day management
of the Funds portfolio, is Brad Means.
Brad Means Mr. Means is a Senior Portfolio Manager at Highland. Prior to joining Highland
in May 2004, Mr. Means was a Managing Director in FTI Consultings Corporate Finance group where he
worked on corporate turnaround, restructuring and bankruptcy advisory engagements. From 1998 to
2001, he was a Director in PricewaterhouseCoopers LLPs Chairmans Office and focused on enterprise
strategy, venture capital, business development and divestiture initiatives. Prior to his role in
the Chairmans Office, Mr. Means worked in the Strategic Change Consulting and the Assurance &
Business Advisory groups of Price Waterhouse serving clients across a broad range of industries
including Automotive, Energy, Financials and Industrials. He holds an MBA from the Stanford
Graduate School of Business and a BSBA in Finance and Accounting from Creighton University. Mr.
Means has earned the right to use the Chartered Financial Analyst designation.
|
|
|
(a)(2) |
|
Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential
Conflicts of Interest |
Other Accounts Managed by Portfolio Manager(s) or Management Team Member
The following table provides information about funds and accounts, other than the Fund, for
which the Funds portfolio manager is primarily responsible for the day-to-day portfolio management
as of December 31, 2009.
Brad Means
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Accounts |
|
Total Assets with |
|
|
Total |
|
|
|
|
|
Managed with |
|
Performance-Based |
|
|
# of Accounts |
|
Total Assets |
|
Performance-Based |
|
Advisory Fee |
Type of Accounts |
|
Managed |
|
(millions) |
|
Advisory Fee |
|
(millions) |
Registered
Investment
Companies: |
|
|
3 |
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
Other Pooled
Investment Vehicles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Conflicts of Interests
Highland and/or its general partner, limited partners, officers, affiliates and employees
provide investment advice to other parties and manage other accounts and private investment
vehicles similar to the Fund. In connection with such other investment management activities, the
Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide
to invest the funds of one or more other accounts or recommend the investment of funds by other
parties, rather than the Funds monies, in a particular security or strategy. In addition, the
Adviser and such other persons will determine the allocation of funds from the Fund and such other
accounts to investment strategies and techniques on whatever basis they consider appropriate or
desirable in their sole and absolute discretion.
The Adviser has built a professional working environment, a firm-wide compliance culture and
compliance procedures and systems designed to protect against potential incentives that may favor
one account over another. The Adviser has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio transactions, personal trading by
employees and other potential conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, the
Adviser furnishes advisory services to numerous clients in addition to the Fund, and the
Adviser may, consistent with applicable law, make investment recommendations to other clients or
accounts (including accounts that are hedge funds or have performance or higher fees paid to the
Adviser or in which portfolio managers have a personal interest in the receipt of such fees) that
may be the same as or different from those made to the Fund. In addition, the Adviser, its
affiliates and any of their partners, directors, officers, stockholders or employees may or may not
have an interest in the securities whose purchase and sale the Adviser recommends to the Fund.
Actions with respect to securities of the same kind may be the same as or different from the action
that the Adviser, or any of its affiliates, or any of their partners, directors, officers,
stockholders or employees or any member of their families may take with respect to the same
securities. Moreover, the Adviser may refrain from rendering any advice or services concerning
securities of companies of which any of the Advisers (or its affiliates) partners, directors,
officers or employees are directors or officers, or companies as to which the Adviser or any of its
affiliates or partners, directors, officers and employees of any of them has any substantial
economic interest or possesses material non-public information. In addition to its various
policies and procedures designed to address these issues, the Adviser includes disclosure regarding
these matters to its clients in both its Form ADV and investment advisory agreements.
The Adviser, its affiliates or their partners, directors, officers and employees similarly
serve or may serve other entities that operate in the same or related lines of business.
Accordingly, these individuals may have obligations to investors in those entities or funds or to
other clients, the fulfillment of which might not be in the best interests of the Fund. As a
result, the Adviser will face conflicts in the allocation of investment opportunities to the Fund
and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties
to each of the clients for which they have responsibility, the Adviser will endeavor to allocate
investment opportunities in a fair and equitable manner which may, subject to applicable regulatory
constraints, involve pro rata co-investment by the Fund and such other clients or may involve a
rotation of opportunities among the Fund and such other clients.
While the Adviser does not believe there will be frequent conflicts of interest, if any, the
Adviser and its affiliates have both subjective and objective procedures and policies in place
designed to manage the potential conflicts of interest between the Advisers fiduciary obligations
to the Fund and their similar fiduciary obligations to other clients so that, for example,
investment opportunities are allocated in a fair and equitable manner among the Fund and such other
clients. An investment opportunity that is suitable for multiple clients of the Adviser and its
affiliates may not be capable of being shared among some or all of such clients due to the limited
scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940
Act. There can be no assurance that the Advisers or its affiliates efforts to allocate any
particular investment opportunity fairly among all clients for whom such opportunity is appropriate
will result in an allocation of all or part of such opportunity to the Fund. Not all conflicts of
interest can be expected to be resolved in favor of the Fund.
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(a)(3) |
|
Compensation Structure of Portfolio Manager(s) or Management Team Members |
Highlands financial arrangements with its portfolio managers, its competitive compensation
and its career path emphasis at all levels reflect the value senior management places on key
resources. Compensation may include a variety of components and may vary from year to year based on
a number of factors, including the pre-tax relative performance of a portfolio managers underlying
account, the pre-tax combined performance of the portfolio managers underlying accounts, and the
pre-tax relative performance of the portfolio managers underlying accounts measured against other
employees. The principal components of compensation include a base salary, a discretionary bonus,
various retirement benefits and one or more of the incentive compensation programs established by
Highland, such as its Short-Term Incentive Plan and its Long-Term Incentive Plan, described
below.
Base compensation. Generally, portfolio managers receive base compensation based on their
seniority and/or their position with Highland, which may include the amount of assets supervised
and other management roles within Highland. Base compensation is determined by taking into account
current industry norms and market data to ensure that Highland pays a competitive base
compensation.
Discretionary compensation. In addition to base compensation, portfolio managers may receive
discretionary compensation, which can be a substantial portion of total compensation. Discretionary
compensation can include a discretionary cash bonus paid to recognize specific business
contributions and to ensure that the total level of compensation is competitive with the market, as
well as participation in incentive plans, including one or more of the following:
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|
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Short-Term Incentive Plan. The purpose of this plan is to attract and retain
the highest quality employees for positions of substantial responsibility, and to
provide additional incentives to a select group of management or highly-compensated
employees of Highland in order to promote the success of Highland. |
|
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|
Long Term Incentive Plan. The purpose of this plan is to create positive
morale and teamwork, to attract and retain key talent and to encourage the
achievement of common goals. This plan seeks to reward participating employees based
on the increased value of Highland. |
Because each persons compensation is based on his or her individual performance, Highland does not
have a typical percentage split among base salary, bonus and other compensation. Senior portfolio
managers who perform additional management functions may receive additional compensation in these
other capacities. Compensation is structured such that key professionals benefit from remaining
with Highland.
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(a)(4) |
|
Disclosure of Securities Ownership |
The following table sets forth the dollar range of equity securities beneficially owned by the
portfolio manager in the Fund as of December 31, 2009.
|
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|
Dollar Ranges of Equity Securities Beneficially Owned by |
Name of Portfolio Manager |
|
Portfolio Manager |
Brad Means
|
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|
|
|
Item 9. |
|
Purchases of Equity Securities by Closed-End Management Investment Company and
Affiliated Purchasers. |
REGISTRANT PURCHASES OF EQUITY SECURITIES
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
(c) Total Number of Shares |
|
Approximate Dollar Value) of |
|
|
(a) Total Number |
|
(b) Average |
|
(or Units) Purchased as Part |
|
Shares (or Units) that May Yet Be |
|
|
of Shares (or |
|
Price Paid per |
|
of Publicly Announced |
|
Purchased Under the Plans or |
Period |
|
Units) Purchased |
|
Share (or Unit) |
|
Plans or Programs |
|
Programs |
July 1, 2009 to July 31, 2009 |
|
|
51,497 |
|
|
$ |
5.484298 |
|
|
|
51,497 |
|
|
|
63,699,468 |
|
August 1, 2009 to August 31, 2009 |
|
|
50,777 |
|
|
$ |
5.681200 |
|
|
|
50,777 |
|
|
|
63,699,468 |
|
September 1, 2009 to September 30,
2009 |
|
|
43,516 |
|
|
$ |
6.337800 |
|
|
|
43,516 |
|
|
|
63,699,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
(c) Total Number of Shares |
|
Approximate Dollar Value) of |
|
|
(a) Total Number |
|
(b) Average |
|
(or Units) Purchased as Part |
|
Shares (or Units) that May Yet Be |
|
|
of Shares (or |
|
Price Paid per |
|
of Publicly Announced |
|
Purchased Under the Plans or |
Period |
|
Units) Purchased |
|
Share (or Unit) |
|
Plans or Programs |
|
Programs |
October 1, 2009 to October 31, 2009 |
|
|
43,396 |
|
|
$ |
6.194101 |
|
|
|
43,396 |
|
|
|
63,699,468 |
|
November 1, 2009 to November 30, 2009 |
|
|
42,484 |
|
|
$ |
6.400600 |
|
|
|
42,484 |
|
|
|
63,699,468 |
|
December 1, 2009 to December 31, 2009 |
|
|
41,864 |
|
|
$ |
6.393357 |
|
|
|
41,864 |
|
|
|
63,699,468 |
|
Total |
|
|
273,534 |
|
|
|
|
|
|
|
273,534 |
|
|
|
|
|
Footnote columns (c) and (d) of the table, by disclosing the following information in the
aggregate for all plans or programs publicly announced:
|
|
|
a. |
|
The date each plan or program was announced: Purchases were made pursuant to an Automatic
Dividend Reinvestment Plan that was last filed with the SEC on June 21, 2006 |
|
b. |
|
The dollar amount (or share or unit amount) approved: NONE |
|
c. |
|
The expiration date (if any) of each plan or program: NONE |
|
d. |
|
Each plan or program that has expired during the period covered by the table: NONE |
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend
nominees to the registrants board of directors.
Item 11. Controls and Procedures.
|
(a) |
|
The registrants principal executive and principal financial officers, or persons
performing similar functions, have concluded that the registrants disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the 1940 Act) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by this paragraph,
based on their evaluation of these controls and procedures required by Rule 30a-3(b) under
the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
|
(b) |
|
There were no changes in the registrants internal control over financial reporting (as
defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the
registrants second fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting. |
Item 12. Exhibits.
|
(a)(1) |
|
The registrants code of ethics is incorporated by reference to Exhibit (a)(1) to the
registrants Form N-CSR filed with the Securities and Exchange Commission on March 9, 2007
(Accession No. 0000935069-07-000565). |
|
|
(a)(2) |
|
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the
Sarbanes-Oxley Act of 2002 are attached hereto. |
|
|
(a)(3) |
|
Not applicable. |
|
|
(b) |
|
Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-
Oxley Act of 2002 are attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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|
|
(registrant)
|
|
Highland Credit Strategies Fund |
|
|
|
|
|
|
|
By (Signature and Title)*
|
|
/s/ R. Joseph Dougherty
R. Joseph Dougherty, Chief Executive Officer and President
(principal executive officer)
|
|
|
Date 3/10/10
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
|
|
|
|
By (Signature and Title)*
|
|
/s/ R. Joseph Dougherty
R. Joseph Dougherty, Chief Executive Officer and President
(principal executive officer)
|
|
|
Date 3/10/10
|
|
|
|
|
By (Signature and Title)*
|
|
/s/ M. Jason Blackburn
M. Jason Blackburn, Treasurer and Secretary
(principal financial officer)
|
|
|
Date 3/10/10
|
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* |
|
Print the name and title of each signing officer under his or her signature. |